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Can the three solutions to the DeFi serial liquidation problem resolve market risks?
链捕手
特邀专栏作者
2021-07-26 02:48
This article is about 3394 words, reading the full article takes about 5 minutes
The chain liquidation from the DeFi lending agreement is one of the most important systemic risks in the DeFi world. This can be analyzed from three dimensions: optimization of the liquidation mechanism, improvement of collateral replenishment efficiency

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01 Optimization of liquidation mechanism

The liquidation mechanism and its algorithm are the core capabilities of the loan agreement, which directly determine whether the user's collateral will be liquidated and the specific price of the liquidation, so as to ensure that the platform and the lender will not suffer losses.

In terms of liquidation mechanism, due to the many major market events experienced by the industry in the past, the current liquidation mechanism of mainstream DeFi lending agreements has been relatively mature and stable. However, since May this year, Venus, BSC’s largest lending agreement, experienced a huge XVS liquidation worth hundreds of millions of dollars. Judging from events, many emerging DeFi lending protocols are still immature in this regard.

Specifically, the liquidation mechanism can be analyzed from three aspects: mortgage asset selection, mortgage rate setting, and price feeding mechanism.

In terms of mortgage assets, lending agreements generally need to choose mainstream assets with high liquidity, relatively dispersed distribution, and not easy to be manipulated as mortgage assets, otherwise it may cause huge abnormal losses to the relevant asset lending users of the platform. In January and May of this year, the BSC loan agreement experienced abnormally large liquidation incidents, all of which were due to the inclusion of two high-control assets, CAN and XVS, in the list of mortgage assets.

In terms of mortgage rate, the loan agreement needs to set a higher mortgage rate to ensure that when liquidation occurs, all mortgaged assets can be liquidated in the market at an appropriate price, so that the market depth is not enough for liquidation and platform losses occur.

Taking ETH as an example, the minimum mortgage rate required by MakerDAO is 150%, the minimum mortgage rate required by Compound is 133%, and the minimum mortgage rate required by other assets is often higher. In May of this year, Venus had a huge XVS liquidation event. One of the main reasons was that the mortgage rate of XVS was only set to 125%, reflecting the poor risk awareness of the platform.

In terms of price feed mechanism, many DeFi lending agreements use external asset prices as a reference for liquidation, such as Chainlink, UMA, Coinbase, etc. However, single-source and insufficiently deep price feed sources are vulnerable to manipulation, and then abnormal liquidation occurs. Therefore, stable and diversified price sources are very important for lending agreements.

at present,

at present,A number of emerging DeFi lending protocols are trying to form a space for dislocation competition by virtue of the second-tier assets that top lending protocols are unwilling to support and low pledge ratessecondary title

02 Improve the efficiency of collateral replenishment

The core cause of collateral liquidation lies in the lack of collateral of users, but in fact many users are not without the willingness and ability to replenish collateral. The situation of serial liquidation of collateral on the chain under the market will also be greatly reduced.

Therefore, many projects are practicing to improve the efficiency of collateral replenishment,The main attempt is to provide an automatic liquidation protection function, that is, to automatically help users replenish collateral when the user's mortgage rate is insufficient, so as to avoid being liquidated. At the same time, users do not need to pay attention to market prices and release more energy.

For example, DeFi Saver, a DeFi aggregation platform, supports users to manage their debt positions in Maker, Aave, and Compound through the platform, and provides automation functions to help users automatically manage mortgage debt positions, allowing users to lower the mortgage ratio of their positions. Automatic repayment at minimum, i.e. using assets currently deposited as collateral to pay off their debt, and automatic increase in loan amount when the ratio rises above the configured maximum value, i.e. allowing users to borrow more for more Mortgage assets.

Another DeFi aggregation platform, Instadapp, has a similar idea. By launching Instadapp Actions, it helps users realize automatic refinancing of debts, and at the same time helps users move their debt positions autonomously between MakerDAO, Aave and Compound according to the best liquidation price .

It is worth noting that this service provided by Instadapp is launched in partnership with Gelato Network, which is an Ethereum smart contract auto-execution protocol that uses robots to automate the smart contract process. The project has also recently cooperated with KeeperDAO to launch the Instant Underwriter (JITU), which constantly monitors the health of positions opened by users in kCompound. If the position falls below a certain threshold, JITU immediately takes action on behalf of the user and provides more collateral as a buffer.

In the process of improving the efficiency of collateral replenishment,Another attempt is to help users get the news of insufficient mortgage ratio as soon as possible. At present, DeFi lending users cannot directly obtain the notification of insufficient mortgage ratio of their positions, which also limits their actions to add collateral in time and improve the health of their positions. The main explorers in this area are EPNS and HAL.

EPNS hopes to help DeFi users get on-chain notifications through wallets, apps, etc. by establishing a decentralized notification layer for Ethereum, but the mainnet has not yet launched. At present, EPNS has reached pilot cooperation with lending agreements/derivatives agreements such as Aave, Alpha Finance, bZx, and UniLend, enabling platform users to subscribe to alerts such as liquidation risks and loan health declines.

HAL is less well-known than the former, but it has been launched in June 2020. It currently supports users to subscribe to the notifications of nearly 10 top DeFi protocols such as Aave and Compound, including loan health warning notifications, and supports notifications to users' mailboxes, Discord, Telegram, Slack accounts send, the current number of users exceeds 4,500.

Some lending projects are also independently developing such services. For example, the BSC lending project Venus, users can choose to set warning notifications for their position mortgage ratio on the account homepage. Sending notifications currently costs 0.06 BNB per month.

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03 Refactor DeFi lending logic

At present, the vast majority of DeFi lending projects adopt an over-collateralization mechanism, which is the basis for liquidating collateral under violent market fluctuations.However, in the past year, there have been many projects based on the credit loan/deficiency loan mechanism in the DeFi industry. The DeFi lending business has been reconstructed at the product logic level, and the lending business has been built based on the trust relationship between users or the offline legal relationship. Reduce the market risk caused by liquidation

Aave launched the credit authorization loan service last year, that is, depositors with idle lending capacity can authorize their own credit lines to the addresses of their trusted users. Borrowing funds can be withdrawn directly without collateral.

Another lending agreement, Union Finance, has a similar idea. Any user can set a credit limit and deadline to a specific address on the platform, and the risk of collateral liquidation is converted into the risk of trust relationship between friends.

The idea of ​​ARCx is to determine the mortgage rate based on the credit score on the chain, that is, to perform credit scoring based on the user’s address’s loan history, asset size, governance experience, etc. The higher the score, the lower the mortgage rate (minimum 105%), that is, the more The same borrowing scale can be obtained with less mortgage assets, and farming opportunities with higher yields can also be obtained. The product hopes to motivate users to pay more attention to credit history through big data behavior analysis and various welfare experiences, and encourage users to repay loans with insufficient collateral, thereby reducing the potential liquidation scale of the market.

Teller, incubated by a16z, is also trying to provide users with credit-based lending services, but it mainly connects users' bank accounts and determines the loan conditions and amount based on their historical records. Those with high credit can obtain unsecured loans or insufficient loans. If the user defaults, Teller will reduce the user's score with the credit rating agencies it cooperates with in a specific way.

Truefi is also exploring unsecured loan solutions, mainly for institutional borrowers rather than retail users, and any borrowers will need to undergo KYC and undergo credit checks. At the same time, each loan needs to be voted by the holders of the platform token TRU. If the borrower defaults on the loan, the platform will liquidate up to 10% of the TRU of the voting users, and at the same time initiate legal proceedings against the defaulter.

Physical mortgage lending is another solution. Projects such as Centrifuge and NAOS Finance are exploring bringing physical assets into the DeFi lending market and there have been many cases. The prices of physical assets are often more stable, and the diversification of mortgage assets will also reduce The pressure on the cryptocurrency market against collateral liquidation.

According to data from Dune Analytics, the current outstanding loan scale in the DeFi market has reached 28.2 billion US dollars, an increase of more than 3 times from the beginning of the yearAt the same time, perpetual contract products based on lending logic are also developing rapidly, which means that the potential liquidation scale of the DeFi market is also greatly increasing the pressure on the secondary market, which has formed an important systemic risk to the cryptocurrency market.

The previous article analyzed the solution to the serial liquidation problem from three dimensions, optimized the product logic of the lending market from different angles, and reduced the probability of on-chain liquidation, especially Instadapp, DeFi Saver and other automatic liquidation protection functions. The TVL of the project has increased rapidly recently. These explorations and data are helpful to improve the health of the DeFi lending market and reduce the volatility of the encryption market.

As for the dimension of reconstructing lending logic, most of these projects are currently in the early stages of development, and the user usage and recognition are not high, and further development is still needed.

From the current point of view, the issue of serial liquidation liquidation as an important proposition in the industry will receive more and more attention, and the overall effect of the aforementioned plan is yet to be tested in the next major market.

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