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The beginning and end of Compound abnormal liquidation

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It is unwise to use any single centralized data source as a price oracle.

Written by: 0x26

On November 26, with the short-term sharp decline in the market, according to DeBank data , the decentralized lending agreement Compound over 90 million US dollars in assets was liquidated. At that time, the total lock-up volume of Compound was about 1.6 billion US dollars, and the liquidated assets accounted for 5.6% of Compound's total assets. The decentralized lending agreement Aave, which has a similar lock-up amount to Compound, has a total liquidation amount of only more than 2 million US dollars, and the difference between the two liquidation amounts is more than 80 million US dollars.

Compound liquidation accounted for 95.8% of the total mortgage loan market liquidation

What happened to Compound?

The main reason for this abnormal liquidation event is the DAI of Coinbase Pro, one of the oracle sources of Compound DAI Unusual price fluctuations. Due to the abnormal increase in the price of DAI on Coinbase Pro, the abnormal increase in the collateral rate of Compound led to a liquidation of 85.2 million US dollars, of which 46 million US dollars of assets of the third largest user of Compound were liquidated. (Rhythm note:The liquidation mechanism in Compound, once the borrower’s collateral is insufficient, anyone can initiate the liquidation process. Participating in the liquidation During the whole process, people will be motivated by the discount of the collateral price provided by the system, so as to ensure that the debt positions of users on the Compound platform can be effectively liquidated.)

Coinbase Pro DAI/USDC trading pair, DAI price rose to an abnormal 1.3

This abnormal liquidation also triggered flash loan arbitrage on the chain. Julien, founder of digital asset service provider StakeCapital, introduced that a user used flash loan from Uniswap's WETH-DAI pool Lent more than 46 million DAI, and recharged this part of DAI into the Compound liquidation system, obtained 2.396 billion cDAI (Compound DAI), then exchanged 2.225 billion cDAI for 46.28 million DAI and returned it to the Uniswap fund pool, and the remaining 17 million as profit 10,000 cDAI can be exchanged for 3.55 million US dollars.

https://etherscan.io/tx/0x53e09adb77d1e3ea593c933a85bd4472371e03da12e3fec853b5bc7fac50f3e4

Community views

For the abnormal liquidation of Compound, the founder of Aave said that if there is a deviation between the normal price and the extreme change, even if the price source submits that the price of DAI is 1.3, Bias would also be extreme and not taken into account.

Chainlink founder and CEO Sergey Nazarov tweeted that “DeFi protocols should Avoid using a single exchange or even just a few exchanges as its price source, regardless of whether it is an off-chain exchange or an on-chain DEX that seems reliable.”
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Nazarov also said that there have been many oracle machine attacks in the past month, and smart contract developers must pay attention to the security of oracle machines. DeFi protocols that access centralized oracle machines often only rely on one or a few off-chain or decentralized exchanges to obtain price data, so user funds face huge risks. I believe that such attacks will cause more and more users to transfer to the DeFi protocol that accesses the decentralized oracle machine to ensure the security and verifiability of the oracle machine. The security of the private key is more sensitive.

Pan Chao, head of MakerDAO China, said that this time the centralized platform price The DeFi liquidation caused by fluctuations is an interesting phenomenon. At the same time, due to the liquidation when the price of DAI is abnormal, the amount of liquidated assets will be higher than normal and difficult to recover.

Compound user lfyke said that this part of the user losses due to abnormal price fluctuations should be paid by Platform Compensation. A user borrowing the stablecoin because it has the least volatility of all other assets gets liquidated instead due to a sudden 30% increase in the asset borrowed. Many platforms, such as Pickle and Harvest, have worked out solutions to reimburse users for their losses. Therefore, Compound should also be responsible.

Founder Response

< p line="7m45">Responding to this incident, Compound founder Robert Leshner said: The Compound protocol itself was not attacked, the code was running normally, and most users and DAI providers were not affected.

It is currently uncertain whether the price of DAI on Coinbase Pro rose to $1.3 was a malicious attack or an accident. At that time, the price of DAI on Coinbase Pro also surged.

Leshner also said that Compound is a project run by the community, and COMP token holders can collectively Modify or run as per current protocol, no admin keys or special permissions, so don't private message me, or use me as the only place to go for help.

Leshner said that in view of the problems exposed this time, he will advise community members to discuss what steps should be taken to prevent similar liquidation events in the future. Potential changes include: modifying DAI market parameters (including borrowing caps) to reduce the size of the DAI market relative to trading platforms; by tightening the anchor range, setting a price cap (for example, setting the price cap to 1.05) or using Other programs to modify the DAI price feed; rely solely on Uniswap in some/all cases, or take a completely different approach.

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