Terra triggers the butterfly effect: DeFi exposes the “evil” side

When all the stars are fading away——The butterfly Effect。

Since the collapse of Terra, there has been a series of reactions in the crypto market.

First, CeFi lending platform Celsius experienced a liquidity crisis, suspending customer transfers and withdrawals; then crypto-asset hedge fund Three Arrows Capital suffered a large liquidation and nearly went bankrupt; crypto-currency lender PayPal Financial froze all account withdrawals; CEX platforms AEX, Hoo suspends withdrawals… Now, the influence spreads to the DeFi world, exposing DeFi to its evil side.

Bancor suspends ILP

On June 20, Bancor, a decentralized exchange protocol, issued an update on market conditions, saying that Bancor’s Impermanent Loss Protection was temporarily suspended due to poor market conditions.

Bancor said the temporary measure to suspend the ILP is to give the protocol some breathing room and recovery, and will be restarted later as the market stabilizes. Also emphasize:

  • There are no attacks, and the funds on the protocol are safe;
  • Users who remain in the agreement will continue to receive benefits, and will receive equivalent impermanent loss protection during the period upon reactivation (withdrawals performed during this period will not be eligible for impermanent loss protection);
  • Transactions remain active across all liquidity pools on the network;
  • Deposits are not currently accepted in order to prevent confusion through direct contract interactions where information on suspension protection is not visible.

Bancor noted that addressing impermanent losses with additional token rewards results in significant selling pressure during periods of high market volatility:

  • The accumulated token reward sell-off over the past 18 months resulted in the need to suspend the ILP.
  • Impermanent loss protection further leads to token devaluation.

The above was exacerbated by the collapse of Three Arrows Capital and Celsius. As long-term LPs in Bancor V2.1, Three Arrows Capital and Celsius are the main beneficiaries of BNT liquidity mining rewards. In order to repay the debt, the two quickly liquidated BNT positions and withdrawn large amounts of liquidity. Another unknown institution opened a large number of BNT short orders on the FTX exchange.

Hasu, head of strategy at FlashBots, said Bancor’s IL stealth game is crashing. They mint new BNT to compensate for the “underwater” LP and call it “IL protection”. Costs are transferred to BNT holders through inflation, which leads to further IL to all other BNT trading pairs, and leads to further inflation. A death spiral.

Chainlink Community Ambassador @ChainLinkGod: Bancor is betting that Celsius is in desperate need of liquidity and won’t wait for ILP to re-enable. However, this requires disabling ILP for everyone, which severely damages Bancor’s reputation for LPs. Best case Celsius exits with no ILP reward, then Bancor re-enables ILP and protects users again; worst case is when confidence wanes, Celsius stays stable and waits for Bancor to re-enable ILP, worst case ILP re-enables, BNT Trapped in a death spiral.

Solend redefines DeFi

On June 19, Rooter, founder of Solend’s ecological lending protocol Solend, posted on social media that a giant whale has SOL deposits worth $170 million and Stablecoin debt positions worth $108 million on Solend. Rooter shouted that he hoped that the giant whale would repay the position as soon as possible.

Then, unexpectedly, Solend put forward an amazing decentralized governance proposal: granting Solend Labs emergency power to temporarily take over the whale’s account to help it complete off-site manual liquidation. The tough move made the community instantly fried. . Solend can justify itself in response to the proposal: if the whale is liquidated, it will be partially liquidated up to 20% of the outstanding loan (about $21 million). Most of the liquidators on Solend are DEX liquidity robots. Large-scale selling will further reduce the price of SOL and cause chain liquidation. Eventually, the liquidity of the protocol will dry up and even lead to bad debts.

A so-called “decentralized” lending protocol based on Solana has “voted” to take over a whale account with emergency powers to eliminate the chance of forced liquidation, according to Dylan LeClair, senior analyst at UTXO Management . “Decentralization” is only in name.

Terra researcher FatMan believes that Solend uses its own discretion to act, although for the safety and health of the protocol. But I can’t really agree with this, it feels like a major breach – it’s beyond the scope of the advice.

Finblox changes withdrawal limit

On June 16, Finblox, a crypto savings yield app, issued an announcement stating that Three Arrows Capital, for its investors and major institutional borrowers, has worked with 8 partners and protocols, including 3AC, to generate yields and distribute them as evenly as possible. Spread risk. Based on the currently available information and the priority of maintaining the integrity of the platform, it was decided to take the following actions while pursuing all available options to assess the impact of 3AC on liquidity and ensure fair treatment of all user assets in the system, 1. Suspend on the Finblox platform Reward distribution for all users; 2. Change the withdrawal limit for users at all levels from $500 per day to a maximum of $1,500 per month; 3. Delay referral programs and deposit rewards; 4. Disable the creation of encrypted addresses for newly registered users.

In the past, practitioners in the crypto world took the rough and the fine on TradFi, created DeFi and infinitely improved and innovated. People are bashing TradFi, but in DeFi and CeFi where everything is happening right now, it’s ironic.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/terra-triggers-the-butterfly-effect-defi-exposes-the-evil-side/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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