Compensation Proposal: Distribute COMP to Affected Users in the DAI Liquidations

Thanks for all your efforts but based on the feedback from the community i feel like the community is willing to support the compensation as long as the compensation % is revised . there’s some good proposal from @wario and @jacobdecatur also maybe it’s worth considering using DAI reserves or combination between $Comp and DAI reserves . in term of fixing the bug ,that’s a more complex issue the discussion to use chainlink has already started here chainlink price feed .
I think this two conversation can go in parallel and they are not mutually exclusive , the compensation proposal doesn’t depend on fixing the bug first , also increasing DAI reserves is a step in the right direction

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I dont have any personal problem with chainlink however it had its own problem in the past (2 which is big deal for compound), while compound’s openoracle also has its advantages and disadvantages, those 2 issues would not happen with compound’s openoracle and thats already 2 “bug” that we avoided by not using chainlink.

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@blck what’s your logic in linking the compensation effort to the bug fix as if the bug is not fixed the compensation can’t go ahead ?

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the compensation part i already said that each user “loss” should be calculated on spot price when the liquidation happend but with “normal” DAI price this would give us the exact “loss” of a certain user a range of 8% to 25%~ probably

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No strong thoughts on if it should be 8% or any other number, overall, I am for compensation. Maybe it is this proposal or a different proposal, but I think we should compensate users. The main reason I’d want to compensate borrowers is because it is still in the early days of DeFi and anything that builds borrower trust in the long term is valuable for the protocol. If the extent of the oracle risks were not clear to the end users, then it is on us as a community to improve our communication around the risks.

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Polychain has decided to vote “AGAINST” Compound Proposal #032.

While we sympathize with those who were affected by the dislocated DAI price and subsequent liquidations, we believe that CP #032 sets a potentially dangerous precedent for a few reasons:

  1. This proposal provides reimbursement before a clear path to fixing the issue has been established. We would like to see a little more clarity around potential solutions before finalizing any form of reimbursement.
  2. This proposal reimburses users even when the protocol worked as designed, and may encourage further systemic risk. We do not want to set the precedent that tail risk should be subsidized by the COMP governance process.
  3. This proposal suggests reimbursement denominated in COMP to a small group of users affected by the issue, despite displaying behaviors that are not aligned with the long-term interest of the protocol. We would prefer a reimbursement proposal denominated in the asset that was liquidated, but are understanding of the additional technical complexity.

We would like to see continued discussion and proposals that work towards improving oracle robustness, implementing insurance funds to provide a finite backstop for unexpected protocol behavior, and exploring alternative methods of reimbursement.

The community has come to a loose consensus that the current oracle system worked as designed, but not as expected. The actual market price of DAI on Coinbase was accurate at the time of liquidation. Regardless of the outcome for CP #032, it is very clear to us that the governing community must work to reduce market risk and improve oracle resilience.

We are voting “AGAINST” this particular proposal, but remain open-minded as it relates to potential reimbursement. We applaud the efforts of @kybx86 to solve these key issues, and we look forward to working with them and the rest of the community to reach a possible solution.

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Does the protocol now use its own open oracle? It isn’t Coinbase “price discovery” solution?
The bug is in the Compound protocol or Coinbase open price feed?
Coinbase states that is a normal market activity (30% stablecoin spike in one hour on their exchange while globally was stable).
What is “bug” in this situation?

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Pantera Capital is voting AGAINST Compound Governance Proposal 32 to distribute COMP to users affected by DAI liquidations on Nov 25 2020 as compensation.

Financial markets are more prone to hidden tail risks when participants deploy instruments with high leverage or for uses far from their intended purpose. Such risks are difficult to measure, which leads to scenarios where returns are attractive and too low at the same time.

As a Compound user (note: not farmer or private investor), we’re responsible for knowing the potential risks involved in using the protocol, including faulty oracle feeds and illiquid markets. Compensating users encourages looser risk-taking when efforts are still underway to measure and mitigate such risks. It also undermines the ability to properly assess risk vs. reward in Compound markets by artificially deflating perceived risk.

Open protocols can aspire to be trustworthy, but they’re permissionless by design. Usage will inevitably go “out of bounds,” despite disclaimers or risk parameters. Compensating users when known risks materialize is unsustainable in the long term.

We’re supportive of solutions that are sustainable and healthy for the protocol, including:

  • protocol insurance funds, with explicitly-stated intent and sources (e.g., market reserves),
  • multi-oracle designs, and
  • removal of “safe max” language in Compound UI.
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Can you please give me the definition what kind of behavior is aligned with the long-term goals of the protocol?
What is my mistake as an affected user in this case?

If the protocol is worked as expected, what isn’t worked as expected?

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You talk about risk management despite the obvious manipulation?

Users didn’t liquidate because of risk management. If under normal circumstances you mean 30% volatility of stablecoin on a single exchange (not globally) then Compound protocol is not a healthy and safe place to hold user funds.
With this statement, you actually said that this protocol is useless. Given the interest on the deposit (0.04% APY) the only healthy feature so far has been the “borrowing LTV” of 75% on Ethereum.
With this kind of thinking, you will lose true customers and you will be left with yield farmers - and then we all know what will happen when a similar protocol offers them better incentives.

We are all aware of your connection to Coinbase Ventures (VC Funds clusters) and it would be bad for Coinbase to admit the malfunction of its product.
Conclusion: A compound protocol based on several VC Funds will probably never be a decentralized platform. Currently, the protocol functions as a joint stock company.

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Really well thought out responses from those voting AGAINST here.

While it makes sense this specific proposal is not going to lead to any compensation (and for good reason) I would be curious to explore ways to reward @kybx86 and all those involved in putting this proposal together.

61% of compensation going to one farming operation and using COMP as payment seems to be the nail in the coffin and makes perfect sense to amend these points.

I’d like to emphasize that with this vote failing, those involved in stewarding this convo are going to feel very defeated and these types of discussions are ones that we should always look to encourage and reward, even if the proposal itself ends up failing.

I would be interested in exploring opt-in grants on a case by case basis to proposal authors that are settled onchain (meaning at least 1M in COMP was required) as to encourage amendments of this proposal and future participation from other politicians.

Thanks everyone for their input and excited to report on this proposal this week.

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@kybx86 has done a very good job by starting a process that brings long-term value to the protocol - trust in the protocol.
I hope that the proposal will be upgraded in certain elements and put to the vote again in cooperation with the big players because otherwise, we are spinning in a circle (proposal - reject).
We should be more concerned about the statements of certain VC funds that see the “Dai liquidation event” as risk management and in fact it is a complex manipulation of the protocol.

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@coopahtroopa I appreciate your thoughtful engagement. Your feedback has been helpful throughout this discussion.

As a liquidated Compound user and COMP holder, I have skin in the game. My hope is that the community doesn’t move on from the objectives of this proposal should I stop driving it. The community should look inward to improve Compound’s risk framework and step up for the 121 users who were liquidated in the events of 11/26, regardless of who steers the boat.

If any member(s) in the community wants to work with me to craft a better compensation proposal, please reach out. (I’ve heard privately from a handful already, and look forward to more).

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Great point. Not enough people speaking about Coinbase’s role here, despite their explicit language to reject prices that deviate from the expected volatility of said asset.

Luke Youngblood, who voted for prop32, is one of the main architects of the Coinbase price feed.

Luke, if you read these forums, we’d be interested in hearing your opinion.

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I’d like to put on the record that the number of users affected was a non-negligible percentage of the userbase.

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Would love to hear input from Coinbase’s trade surveillance head apart from their “short” comment here.

Would also appreciate it if Coinbase can shed more details on the said event.

@Elkins I was wondering if Coinbase can atleast provide anonymized data on said price event. Also, if possible, could Coinbase also divulge the volume of orders needed to move the CB’s Dai market by 30% . Thank you!

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Potentatial risk when somebody need cheap Ethereum, manipulate the market with front-running and false-reporting, get my Ethereum for 1ETH:377$ (because global price of DAI in moment is 1$) with nice premium of 100-150$ per Ethereum.
And Pantera Capital said that I need to know risks in that “fairytale risk story”.
I didn’t know the risk of being robbed by protocol aggressive liquidation system powered by bots.
I didn’t know that the “borrowing function” should not be used.
I was used Compound before COMP token issuance because protocol had use case for my business and I didnt know that criminal activities are allowed.

I just used lending/borrowing service(product) when protocol was manipulated - i didnt farm COMP, I was used stablecoin for business liquidity - what is the point?
That Alex Mashinsky (Celsius) REPUTATION worth more than Compound protocol? I know that worth more than Pantera Capital for sure.
Your statement really raises the question: “Do we really need DeFi?”

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Not sure, why you want to dig deeper into the events which happened at Coinbase. No matter which the exact reason for this market dislocation was, the root cause for the “liquidation event” is, that the open oracle uses Coinbase as a single price source. If you want to dig deeper, I think you should ask, why the open oracle ever is gone live with only one price source.

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Because it was voted to go live with one oracle. here:

Because I want to see the volume/cost used to move the coinbase dai market, and why no arbitrages on that price spike happened. In short I want to get to the bottom of how that spike happened as reference on ideas on how to better harden the oracle system

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Sure, that’s obvious. But why was this proposal ever created? A good source for this answer could be the author of the proposal.

Hardening the oracle is very simple: just use more price sources. Check here for a possible solution.

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