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Under the test of extreme market conditions, what crises will the DeFi protocol face?

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Every extreme market is a big test for the DeFi protocol.

Original title: "Under this round of stress tests, how did the DeFi protocols perform? "

Original author: Qin Xiaofeng, Odaily Planet Daily

Recently, Bit The prices of Bitcoin and Ethereum continued to fall, hitting new lows in the past year. The entire encryption market has been affected, and DeFi is hardly immune to it. The data shows that the total amount of locked positions on the chain has halved from $163.5 billion in early May to the current $81.8 billion.

Today, Odaily Planet Daily will analyze the performance of major projects under extreme market conditions from the two subdivision tracks of decentralized lending and decentralized trading. In general, leading projects such as MakerDAO, Aave, and Compound are calm and follow rules, and they are well-organized in both governance and liquidation; emerging projects such as Solend and Maple have frequent problems and problems, which expose their own shortcomings and their problems. ailments in the field. We also hope that these experiences and lessons can provide reference for DeFi practitioners and promote the progress of DeFi.

DeFi lending, liquidation incapacity

The market is going down, DeFi lending is the first among them, facing liquidation. Some DeFi agreements have also exposed several problems that cannot be ignored in the recent liquidation, which deserves special attention:

One is the failure of the oracle machine, which caused the liquidation to fail Work properly. Processes such as liquidation rely on on-chain oracles for accurate quotations. During the LUNA crash on May 12, Chainlink suspended the LUNA price update due to a malfunction, causing the lending agreement Venus to fail to respond to the liquidation in time, resulting in a loss of more than $14 million.

Coincidentally, half a month later, the same oracle quotation loophole reappeared. On May 30, the new Terra chain was launched, and the oracle machine on Anchor, the largest lending agreement on the Terra chain, misreported the price of LUNC (Luna Classic) as $5 (Note: The price of LUNC is $0.00001, and the price of LUNA is $5 U.S. dollars); users of the platform took advantage of quotation loopholes to successfully arbitrage. Fortunately, the team responded in a timely manner, and finally lost only 800,000 U.S. dollars.

In any case, the bloody lesson has also reminded DeFi protocols: choosing multiple oracles as quotation sources can more effectively avoid single points of failure.

Second, there are flaws in the design of the liquidation procedure itself, which fails to respond in a timely manner. Also during the crash period of Terra, the issuer of the algorithmic stablecoin MIM (Abracadabra) also incurred bad debts of US$12 million. Not enough speed.

The liquidation procedure is an important content that needs to be designed in the early stage of the DeFi lending agreement. For example, when liquidating, do you choose to process the collateral through an off-site auction, or are you throwing it directly into the market? If you choose the market, should you choose DEX or CEX, which platform or platforms should you choose?

For example, in the early days of MakerDAO, some liquidated assets would be auctioned at a discounted price, but currently most DeFi lending agreements choose to be liquidated directly through DEX . Looking back at the summary, it is found that Abracadabra did not make a preset plan at the beginning, because it did not expect the possibility of UST's substantial de-anchoring.

Third, the collateral has poor liquidity and high volatility, which is more likely to aggravate bad debts. Of course, it should be noted that the speed of liquidation is not only related to the design of the product itself, but may be directly linked to the "quality" of the collateral. For example, some altcoins are highly volatile, falling by 20% at every turn, and their liquidity is not good. In a unilateral downward trend in the market, their liquidation is more difficult; Faced with a run on, resulting in a serious discount, the current conversion ratio of stETH to ETH on Curve is currently 1:0.9368.

In fact, the leading DeFi lending projects have established a set of strict collateral screening standards. Taking Compound as an example, it accepts a total of 20 kinds of collateral, 7 of which are stablecoins, and three of the top five (USDC, ETH, WBTC, DAI, USDT) are stablecoins. Whether these Tokens are Both liquidity and stability have been tested for a long time, and the risks are controllable.

Even if there are certain preparations and plans, it does not mean that the loan agreement can reduce or avoid liquidation. Liquidation is a routine operation for DeFi lending, and leading projects are no exception.

During the decline in the past week, the MakerDAO treasury liquidated nearly 100,000 ETH; The liquidated assets reached 398 million US dollars, of which Aave liquidated about 160 million US dollars, accounting for 40%.

"Credit Loan" is difficult to cash, and is about to face a crisis?

Currently the most important form of DeFi lending is over-collateralization, that is, if the borrower wants to obtain USD 100 in DAI, he needs to invest USD 150 (for example) in ETH or Other cryptocurrencies are used as collateral, but there are also some products that try to make undercollateralized loans to improve capital efficiency, the so-called "credit loan" or "credit combined mortgage".

Different from AAVE's "Flash Loan", unsecured credit loans on platforms such as TrueFi and Maple adopt a review system, and only open loan applications for borrowers who have passed the review , and are basically service organization users. For example, TrueFi launched the first single borrower pool for Alameda Research in March this year, providing it with up to $750 million in working capital; it launched a single borrower pool for Blockchain.com in April, providing up to $100 million in liquidity.

But in recent days, credit loans have been difficult to pay in the short term. On June 21, Maple announced that there may be liquidity problems in the fund pool this week, and lenders (Lenders) may not be able to withdraw funds, and must wait for borrowers (Borrowers) to repay in the next few weeks before withdrawing cash.

Suddenly, rumors spread, and the market believed that Maple might be implicated by Celsius and Three Arrows Capital, resulting in a break in the capital chain. In response, the official response stated that Celsius and Three Arrows Capital never borrowed through Maple. However, the platform admitted that Babel Finance had a loan position of 10 million USDC in the USDC pool of the Canadian hedge fund Orthogonal Trading on the platform; since Babel stopped withdrawing, Orthogonal has been in touch with Babel management and focused on protecting the lender's Benefit.

In addition to Maple, another platform TrueFi does have Sanjian Capital among its customers. The data shows that on May 21 this year, Sanjian borrowed 2 million US$ from TrueFi , and the repayment is expected in August month. However, considering the current difficulties faced by Sanjian, this loan may eventually become a bad debt.

In addition, according to the statistics of Twitter user @plzcallmedj, the repayment time of Alameda, Wintermute, Amber, Nibbio, FBG and Folkvang and other institutions will be concentrated in July and August. "Personally, I think the risk is very high. These companies that advertise hundreds of millions/billions are all borrowing short-term loans of tens of millions or hundreds of millions with an annualized rate of close to 10%, while mortgage loans only need 2%-3 % interest rate, indicating that most of these institutions are very tight. And TrueFi has 3AC bad debts, it is destined to be a thunderstorm, it is only a matter of time."

As the Three Arrows incident fermented, more organizations stood up and spoke out, trying to disentangle the relationship. Clearpool, a decentralized lending platform, removed the borrower pool of TPS Capital under Three Arrows, and claimed that there was no loss of funds; Nexo, an encrypted lending platform, tweeted that it rejected Three Arrows Capital’s request for unsecured credit two years ago, and that Three Arrows Capital exposure is zero.

This kind of "credit loan" of the main service organization avoids the occurrence of bad debts to a certain extent, and makes up for the shortcomings of the DeFi lending market. However, as the market went down, the leverage in the DeFi market was cleared, institutional users were liquidated one after another, and their repayment ability was questioned, which may eventually lead to the drying up of the liquidity of the agreement funds and a series of stampedes. Generally speaking, under the condition of an incomplete credit system, "credit loan" is relatively advanced, and it is not yet ready for large-scale promotion in the market.

DEX: Price unanchored, removal of impermanence loss protection

In the past period of time, go The liquidity issue of centralized trading platforms has also attracted much attention.

First of all, Uniswap, as the largest DEX at present, its cumulative trading volume has already exceeded 1 trillion US dollars (May 24), but it still faces short-term liquidity The problem of insufficiency. On June 13, as MakerDAO liquidated ETH, a large amount of ETH flowed to Uniswap, causing the price to crash below $1,000. At that time, the fair price was $1,350, and the slippage was as high as 25%.

Fortunately, the ETH price on Uniswap quickly recovered and returned to a fair price. But if we observe other ecological agreements, we will find a hidden problem: the TVL of the largest DEX in the ecology is far lower than the TVL of the largest lending agreement. Especially in the Solana ecosystem, the Solend TVL in its largest lending agreement was once more than twice that of Serum. When the market goes down, when Solend liquidates SOL collateral in Serum and other DEXs, it may directly drain the liquidity on the chain, causing the price of SOL to be greatly suppressed, which in turn triggers the liquidation of other accounts. This is also the core reason why Solend recently proposed a takeover proposal.

In addition, as the market goes down, the impermanent loss in DEX will also expand, and the handling fee earned by LP may not be able to make up for the loss at all, further reducing the liquidity provided enthusiasm.

About impermanence loss, Bancor previously launched the special function "impermanence loss protection" mechanism in V3 (https://www.odaily.news/ post/5174503), liquidity providers who meet the above conditions can obtain Bancor's 100% impermanence loss insurance at the same time when withdrawing liquidity, but Bancor has recently suspended this mechanism. The fundamental reason is that the market is going down. If LP withdraws from Bancor at this time, it will need to pay sky-high insurance premiums, and it will also lead to a decrease in Bancor's liquidity, which it does not want to see.

"Withdrawals performed during this period will not be eligible for impermanent loss protection, users who remain in the agreement will continue to receive benefits and are entitled to Get its fully protected value when the protection is reactivated," Bancor said.

Summary

Every extreme market is a big test for the DeFi protocol.

In general, the mature leading projects can submit satisfactory answers under this round of stress tests, while the new projects are more or less exposed problem, this will be the only way for it to mature. Back then, MakerDAO also incurred bad debts of $4 million during the "312" crash, but eventually got out of the shadow of failure and grew into today's "DeFi central bank."

Under the test of extreme market conditions, decentralized governance has also become a hot topic. We have seen discussions on "procedural justice" and "result justice" (read "The "DeFi Moral Paradox" Behind the Solend Farce"). In this regard, the leaders of DeFi protocols have already given the answer: Since "Code is Law" is advocated, then act according to the rules, and liquidation should be done; Time to vote.