Since I have received several DMs about this in the past 24 hours, I feel like I have to address a common misconception about what this proposal is suggesting.
This proposal is in no way shape or form increasing the liquidation penalties to Compound users or acting in any other way predatory towards compound users.
When liquidations are possible on Compound due to price updates, the Compound protocol incentivises anyone that wants to, to liquidate positions by offering a discount on the collateral of the user that gets liquidated.
In simple terms this means that if a $100K user position is to be liquidated and there is a 10% liquidation penalty, the compound protocol is enabling someone to acquire $100K worth of collateral for effectively $90K.
This means that there is potentially $10K in profits to be made for anyone that performs this liquidation.
This in an insane amount that is being paid, because liquidators on mainnet regularly give up 99.9% of this incentive to block builders as bribes during blockspace auctions.
So, what are we suggesting here?
This proposal aims to effectively run auctions on the $10K that are available and that Compound is missing out on and to return as much of that as possible back to the protocol. It improves the efficiency of liquidations and returns money back to the protocol instead of needlessly leaking it away to third parties.
On this dashboard I’ve illustrated that Compound has already paid out nearly $13M in liquidation incentives on all V3 markets (live since roughly two years).
Considering that auctions have the potential to recapture up to 99.9% of this value, Compound quite easily has the potential to triple protocol revenue.
Current calculations (as well as other dashboards) illustrate the revenue of Compound at roughly $3 Million a year. Considering that $13 Million were paid out in the past two years that theoretically can be recaptured going forward, this number could be more than tripled to $9.5 Million at optimal recapture rates. Even at recapture rates of 50%, the protocol revenue could still be doubled to $6.25 Million
What we‘re proposing here is an immediate fee switch for Compound that takes advantage of the competitive nature of third-parties for liquidation incentives by giving them a place for this competition to take place, and returning all of the resulting money back to Compound.
At this point, we‘re truly unsure how else we can proceed to prove viability of something that has the potential to double or even triple protocol revenue. In fact, we‘re somewhat perplexed that there seems to be little to no desire to actually bring in several millions a year more to the protocol.
@L_alive is one of our engineers behind our OEV product and will be available on Wednesdays community call to address any comments, questions or concerns on the matter. We would love and appreciate a healthy debate on the matter.