Plunge brings big test for DeFi or foreshadows future of multi-chain landscape of ethereum, polka, etc.

No liquidation, no DeFi

Plunge brings big test for DeFi or foreshadows future of multi-chain landscape of ethereum, polka, etc.

The 519 tragedy must still be fresh in your mind, and it’s hard for an insider to forget this day, after all, it was an epic waterfall that could be “on par” with 312.

You may have also heard about the embarrassment XVS suffered on the day of 519, XVS suffered an “epic” liquidation, and this liquidation, in essence, had almost nothing to do with the plunge on the day of 519.

The thing is, Venus is known to be able to mortgage XVS, lend BTC or ETH and other assets at a mortgage rate of 80%, and the liquidity of XVS is actually much worse compared to mainstream coins. A large account found this “loophole”, there will be the following divine operation: 1.

  1. Spend tens of millions of dollars in a short period of time to pull the price of XVS down from $70 to $140.
  2. high mortgage XVS lent four thousand BTC and tens of thousands of ETH.
  3. Run away.
  4. Let the price of XVS fall rapidly and start liquidating.
  5. XVS was unable to liquidate in a short time due to lack of liquidity, causing hundreds of millions of dollars of bad debt to the XVS platform.

According to one community member, millions of XVS to be liquidated were hanging there at low prices, and it took more than ten hours for liquidators (most likely bots) to slowly buy them all.

This led us to think: under the current multi-chain universe, can each chain really run a good set of DeFi’s financial system independently? Including exchange, borrowing generation, stable coins, synthetic assets.

In the current state of the blockchain, the answer is likely to be “no”.

The Ubiquitous Clearing
Liquidation is something you don’t normally notice at all, because it really doesn’t happen much. However, when the extreme market comes, liquidation is everywhere.

Take the four basic pieces of DeFi: exchange, debit, stablecoin (in this case, Defi’s native crypto-collateralized stablecoin, such as DAI, LUSD, etc.) and synthetic assets. You will find that except for exchange, the other three have a clearing mechanism as their core component.

In short, there is no DeFi without clearing, and every extreme market, like 312 and 519, is a big test of the clearing mechanism of each project and the “health” of the whole DeFi system.

The liquidation varies from platform to platform, for example, MakerDAO is an asset auction mechanism, Compound and AAVE is a mechanism for liquidators to take over debtors’ positions directly at a discount, and the recent stablecoin newcomer Liquity LUSD has set up a triple liquidation (stable pool, debt position transfer, global liquidation) mechanism, which interested friends can check out on their own, so I won’t go into it here.

However, no matter what kind of liquidation mechanism, there are three basic steps that cannot be avoided.

  1. To be liquidated assets discounted.
  2. The liquidator buys out the discounted debt.
  3. The liquidator sells the debt bought at the discounted price.

It is easy to see that the role of the liquidator is at the heart of the entire liquidation system.

312 MakerDAO Liquidation Failure Simple Review
Like miners, liquidators are a group of people who are financially incentivized. After all, liquidation assets are sold at a discount, and as long as you grab them and sell them in a short enough time, it’s an almost surefire deal.

They are constantly on the lookout for liquidation-eligible or near-liquidation assets in MakerDAO, Compound, AAVE and Liquity, and will rush in when liquidation occurs. It’s like a bunch of vultures staring at a dying rabbit, and the moment it falls, it’s up to the one who dives faster and catches it more accurately.

I guess it’s not hard to think how such things can be watched by human eyes, it must be countless written robot programs that are constantly monitoring there all the time.

Ether is a dark forest, there are not only various arbitrage robots lurking in the dark, there are also various liquidation robots on standby at all times, and many liquidation robots will use advanced tools such as lightning loans for 0 risk liquidation (buying discounted assets with their own money and then trying to sell them at the original price, there is a risk of “not making ends meet” in the process of rapid price decline).

So why did 312MakerDAO end up with a $0 price to win the auction, thus accumulating millions of bad debts? Mainly because at that time ETH plug to Gas cost has exceeded 1000gwei (1 ETH = 10^9Gwei), which led to two consequences.

  1. MakerDAO auction mechanism, the most congestion is a lot of bids higher than 0 exchange because of the Gas cost is not enough, and thus not packaged.
  2. More critically, many clearing bots stopped in that ultra-high Gas situation. It is easy to understand that robots are profit-seeking, when the Gas cost is too high, more than the asset discount price, or the Gas cost of each failed liquidation is too high, then many robots will “stop”.

This is the same reason that every time the price of BTC falls below the “shutdown price” of many mining machines, resulting in the shutdown of mining machines. It is said that only three clearers were left to bid in the MakerDAO auction on 312, and each one (or bot) won the auction for $0.

XVS exposed the clearing depth problem
312 exposes the problem that MakerDAO encountered on ETH with the “liquidator buying away “discounted debt” step, while 519 exposes the problem that XVS encountered on BSC with the “liquidator selling” step of debt bought at a discount.

Simply put, when the $80 XVS discounted to 70 was bought by the liquidator, the liquidator found that because of the slippage and the depth of the problem, the volume can only be sold to 65 when re-sold, which is embarrassing ……

This is also the original calculations of the large account that jacked away XVS wool. In their own hands XVS enough, want to ship, the market depth can not take their own “smash” premise, the XVS mortgage to the system, equivalent to 80% of the highest price (XVS mortgage rate) sold all the XVS on hand, and the receiver is all the liquidators + can not be liquidated by the system’s own bad debt.

This has caused a lot of discussion, especially since the 80% collateralization rate for XVS as a less liquid asset is too high, which triggered this bad debt event, and if the collateralization rate was 50%, these problems might not have happened at all.

Alternatively, if only highly liquid assets like BTC and ETH are accepted as collateral, such problems can also be avoided. So the question is, even if only high liquidity assets like BTC and ETH are accepted as collateral, will liquidation be a problem in the environment of multi-chain universe?

Liquidation and blockchain endgame in a multi-chain universe
You see, the liquidator Or liquidation bot is profit driven by nature.

So you need to make sure that after he buys the collateral being liquidated at a discounted price, he can immediately find a platform (usually speaking, Dex) to sell these collateral at a price higher than his buy price, guaranteeing that the liquidator makes a profit.

We had only one Ether, we had Uniswap, we never worried about the depth of WBTC, ETH and some mainstream Defi coins, so Compound, MakerDAO, AAVE, we didn’t worry about the “liquidator selling ‘bought at a discount’ debt” step.

However, the XVS incident has given us a wake up call, even if we only accept BTC and ETH as collateral, do we have enough BTC and ETH in a multi-chain universe?

You see, we now have ETH, EOS, TRX, BSC, HECO, Solana, Fantom, Cosmos, Polkadot, Avax …… these are still just the main chains.

L2 or sidechain, we have Loopring, Xdai, Matic, just Rollup family on Arbitrum, in a couple of months there is Optimism, and in a few months no surprise we will see ZkSync, Startware, Aztec ……

It seems I haven’t counted some cold mainchains like Waves, Ada, old generation NEO, Quantum, IOST, etc. ……

If we think the end game of blockchain, or at least the last few years will be such a swarming multi-chain universe.

What do you think is the likelihood of running all four DeFi pieces on each chain: exchange, lending generation, stable coins, synthetic assets? In terms of clearing alone, it would have to satisfy.

  1. this chain has BTC, ETH, or DEX of mainstream collateral on it
  2. The LP pool of this DEX must be deep enough
  3. The LP of DEX must also be large enough. Yes, many of these chains on the mainstream pair of LP is a few large investors to provide, once the liquidation occurs or before, they withdrew the pool what to do?

According to this criterion, it’s not a stretch to say that there are really not many of the dozens of chains listed above that can meet it.

If you think DeFi will be the future of blockchain (at least for the time being), then according to Defi, especially from the perspective of liquidation, the endgame of blockchain multi-chain universe in a few years will be the following.

1 Multi-chain universe co-exists.

In theory, if L2 is fast enough to enter and exit L1, and there is enough perfect cross-chain mechanism for multi-chain universe, then the problem of insufficient depth of DEX of single chain when the black swan level clearing is triggered can be solved by the clearing robots from each other chain “moving”.

Because this shares the overall liquidity of the multi-chain universe to a certain extent, but it is only a theory, and it is too difficult to quickly and perfectly connect so many chains with different standards in practice.

2.1 Ten thousand chains to ETH.

One chain + one L2, ETH enters L2 Rollup + 2.0 splitting era, TPS and GAS are no longer a problem; RollupL2 completes the chicken-eating feat, leaving one of the most capable Rollup KO all other Rollups, and depth is no longer a problem. In terms of liquidation, this should be the most “comfortable” model.

2.2 One chain to ETH.

One chain + multiple L2, ETH enters L2 Rollup + 2.0 splitting era, TPS and GAS are no longer problems; RollupL2 warring states era, serious fragmentation, but found a way to open each Rollup, such as state channel or aggregator, the depth is OK in this case. clearing, the complexity is definitely higher than 2.1, lower than 1.

3 million chains are normalized to Polkadot.

From the clearing point of view, Polkadot has two major advantages, one is the underlying design, ETH clearing needs a TX to trigger, while Polkadot can do it directly.

Secondly, the standardized multi-chain of Polkadot parallel chain has a common interface, which is much more practical than the first heterogeneous cross-chain where the multi-chain universe coexists, and has more advantages compared to 2.2, and the biggest opponent should be 2.1 scenario.

Of course, this is just to extrapolate the development of blockchain from a perspective of Defi and clearing, just to provide a thought, you should not take it seriously.

One last word about clearing, Uniswap V3 provides N times higher capital efficiency than Uniswap V2 through LP (liquidity provider) market making that provides granularity control, but if you think about it the other way around, in a large interval range, V3 theoretically also means N times lower depth than Uniswap V2.

When the Black Swan extreme event occurs mass liquidation …… increasingly has a Wall Street kind of Feel: the higher the efficiency, the bigger the bubble.

Author | Five Fireball Godfather

Posted by:CoinYuppie,Reprinted with attribution to:
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