How did the DeFi protocols perform in this round of stress tests?

Some mortgage loans are incapable of liquidation, and some credit loans are difficult to redeem.

Recently, the prices of Bitcoin and Ethereum have continued to fall, hitting new lows in the past year. The entire crypto market has been affected, and DeFi is not immune to it. Data shows that the total amount of locked positions on the chain has dropped 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 sub-tracks of decentralized lending and decentralized trading. In general, leading projects such as MakerDAO, Aave, Compound, etc. are calm and follow the rules, and both governance and liquidation are in good order; emerging projects such as Solend, Maple and other emerging projects have frequent situations and problems, exposing their own shortcomings, and also revealing their location. ills 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 failure

When the market goes down, DeFi lending is the first to face liquidation. Some DeFi protocols have also exposed several issues that cannot be ignored in the recent liquidation, which are worthy of attention:

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

Coincidentally, half a month later, the same oracle machine quotation loophole appeared again. On May 30, the new Terra chain was launched. An oracle on Anchor, the largest lending protocol on the Terra chain, misreported the price of LUNC (Luna Classic) as $5 (Note: The price of LUNC is $0.00001, and the new currency LUNA is $5 USD); users of the platform exploited the quotation loophole to successfully arbitrage, but fortunately the team responded in a timely manner, and ultimately only lost 800,000 US dollars.

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

Second, there are defects in the design of the liquidation procedure itself, which fails to respond in a timely manner. Also during the Terra crash period, the issuer of the algorithmic stablecoin MIM (Abracadabra) also incurred bad debts of US$12 million. The main reason was that UST, one of the pledged assets behind the MIM stablecoin, was de-anchored, and the Abracadabra liquidation process was not started in time, and the liquidation Not enough speed.

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

For example, in the early days of MakerDAO, some liquidated assets will be auctioned at a discounted price, while most DeFi lending protocols currently choose to liquidate 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 major de-anchoring.

Third, the collateral is illiquid and volatile, which is more likely to exacerbate 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 related to the “quality” of the collateral. For example, some altcoins are highly volatile, often falling by 20%, and the liquidity is not good. In the unilateral downturn of the market, their liquidation is more difficult; even the interest-earning asset of Ethereum (stETH), some time ago. Faced with a run, resulting in a serious discount, the current exchange ratio of stETH to ETH on Curve is currently 1:0.9368.

In fact, major DeFi lending leading projects have formulated a strict set of collateral screening criteria. Taking Compound as an example, it accepts a total of 20 types of collateral, 7 of which are stable coins, and three of the top five collateral lock-ups (USDC, ETH, WBTC, DAI, USDT) are stable coins. Both liquidity and stability are time-tested, and risks are controllable.

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

In the past week’s decline, the MakerDAO vault has liquidated nearly 100,000 ETH; the data of the masters on the Ouke cloud chain shows that in the past week, the liquidated assets on the chain reached 398 million US dollars, of which Aave liquidated about 160 million US dollars, accounting for 40%.

“Credit Loan” is difficult to pay, is it about to face a crisis?

At present, the most important form of DeFi lending is over-collateralization, that is, if a borrower wants to obtain USD 100 of DAI, he needs to invest USD 150 (for example) of ETH or other cryptocurrencies as collateral, but there are also some products that are trying to be under-collateralized. Loans to improve capital efficiency, the so-called “credit loan” or “credit combined mortgage”.

Different from AAVE’s “flash loan”, the unsecured credit lending of platforms such as TrueFi and Maple adopts a review system, and only open loan applications for borrowers who pass the review, and they are basically service agency 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; in April, it launched a single borrower pool for, providing up to $100 million in liquidity.

However, in recent days, short-term payment of credit loans has been difficult. On June 21, Maple announced that there may be liquidity problems in the fund pool this week, and lending users (Lenders) may not be able to withdraw funds, and must wait for borrowers (Borrowers) to repay the account in the next few weeks.

For a while, rumors spread, and the market view 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 never borrowed money through Maple. However, the platform admits that Babel Finance has a 10 million USDC lending position in the USDC pool of Canadian hedge fund Orthogonal Trading on the platform; since Babel stopped withdrawals, Orthogonal has been in touch with Babel management and is focused on protecting the lender’s Benefit.

In addition to Maple, TrueFi, another platform, does have Three Arrows Capital among its clients. Data shows that on May 21 this year, Three Arrows loaned $2 million from TrueFi and is expected to repay in August. But considering the current predicament facing Sanjian, this loan may eventually become a bad debt.

How did the DeFi protocols perform in this round of stress tests?

In addition, according to the statistics of Twitter user @plzcallmedj, the repayment time of institutions such as Alameda, Wintermute, Amber, Nibbio, FBG and Folkvang will be concentrated in July and August. “Personally, I think the risk is very high. These companies that publicize hundreds of millions/billions are borrowing tens of millions or hundreds of millions of short-term loans that are close to 10% annualized, while mortgage loans only require 2%-3%. The % interest rate shows that most of these institutions are very tight. And TrueFi has a bad debt of 3AC, it is destined to thunder, it is only a matter of time.”

As the Three Arrows incident fermented, more institutions came forward to speak out, trying to clear the relationship. Decentralized lending platform Clearpool removed Three Arrows’ TPS Capital borrower pool, claiming that there was no loss of funds; encrypted lending platform Nexo tweeted that it rejected Three Arrows Capital’s unsecured credit request two years ago. exposure to zero.

This kind of “credit loan” of major service institutions avoids the generation of bad debts to a certain extent and makes up for the shortcomings of the DeFi lending market. However, as the market goes down, the DeFi market clears the leverage, institutional users are liquidated one after another, and their repayment ability is questioned, which may eventually lead to the exhaustion of the liquidity of the protocol funds and a series of stampedes. In general, under the conditions of an incomplete credit system, “credit loans” are relatively advanced, and they are not ready for large-scale promotion in the market.

DEX: The price is off the anchor, and the impermanent loss protection is cancelled

In the past period of time, the liquidity problem of decentralized exchanges has also attracted much attention.

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

Fortunately, the price of ETH on Uniswap quickly recovered and returned to the fair price. But if we look at other ecological protocols, we will find a hidden problem: the TVL of the largest DEX in the ecosystem is much lower than the TVL of the largest lending protocol. Especially in the Solana ecosystem, Solend TVL was once more than twice that of Serum in its largest lending protocol. When the market goes down, when Solend liquidates SOL collaterals in DEXs such as Serum, it may directly drain the liquidity on the chain, resulting in a sharp suppression of SOL prices, which in turn triggers the liquidation of other accounts. This is the core reason for Solend’s recent takeover proposal.

In addition, as the market goes down, the impermanent losses in DEX also expand, and the fees earned by LPs may not make up for the losses at all, further reducing the enthusiasm for liquidity provision.

Regarding impermanent loss, Bancor has previously launched a special feature “impermanent loss protection” mechanism in V3 (, liquidity providers who meet the above conditions can withdraw liquidity At the same time, Bancor’s 100% impermanent loss insurance, which Bancor has recently suspended. The root cause is the market downturn. If LPs withdraw Bancor at this time, they will need to pay sky-high insurance premiums, which will also lead to a decrease in Bancor’s liquidity, which they do not want to see.

“Withdrawals performed during this period will not be eligible for impermanent loss protection, and users who remain in the agreement will continue to receive benefits and have the right to receive their fully protected value when impermanent loss protection is reactivated,” Bancor said.


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

In general, mature leading projects can hand in satisfactory answers under this round of stress tests, while new projects have more or less exposed some problems, which will be the only way for them to mature. At that time, MakerDAO also generated $4 million in bad debts during the “312” crash, but it 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, and we have seen discussions on “procedural justice” and “consequential justice”. In this regard, the leaders of DeFi protocols have given the answer: since “Code is Law” is advocated, then follow the rules, and the liquidation will be liquidated; all governance is carried out according to the process, and even if the situation is urgent, there is enough time for voting vote.

Posted by:CoinYuppie,Reprinted with attribution to:
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