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

Hi darbar, my intention is not to reduce compensation, but to separate users from farming operations that were using the protocol in a way that was not intended in order to game the incentives via farming which is not positive for the protocol and net negative for normal users who get diluted from rewards. I’m sorry that you feel this way and have to assume you must be in the farming category. I believe a significant part of the community has shown that they are not willing to bail out this type of users, and with good reason. I am hoping that a compromise can be reached so that normal users are not treated in the same way as users who were intentionally exploiting the incentive program for their own benefit by performing wash loans and knowingly keeping their accounts for months previous to the incident at unhealthy levels.

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I am not in farming category. I am using protocol to stay liquid in hardware mining business.

I agree with you.
But without users in the farming category, protocol wouldn’t have this market cap and TVL.
I have noticed before that there is no mechanism to regulate the “unhealthy” behavior of yield farmers especially since the hype has been built on that.
In the end, the real users are damaged.

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I don’t think it is clear that spuriously inflating TVL via wash loans is good for COMP’s market cap and we must also consider that the constant dumping of COMP by farmers implies a significant amount of sell side pressure on the markets. If you are not in the farming category then what I am proposing would help in recouping some of the unfairly liquidated collateral due to Coinbase mispricing. I understand that the 8% incentive is less than what you might have lost due to the offprice liquidations, but believe this is better than no compensation at all.

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I agree with you and appreciate your commitment in this case and I understand that it is difficult to align the interests of users and COMP holders.
However, it is difficult to come to terms with the fact that the Compound protocol is centralized and is mentioned everywhere as a top DeFi project.

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Right now the only “proof” we have as far as I’m aware is from this post from CB’s trade surveillance team, which I’m not entirely sure is verified. Regardless, definitely a little concerning to rely on such a centralized source.

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I took a stab at modeling out this strategy.

The way I see it there are 4 questions we should reach agreement on in regards to compensation.

  1. What was the actual damages in raw numbers
  2. What percentage should be compensated (The proposal that @kybx86 suggested was intended to cover the liquidation incentive of 8%)
  3. What modifiers should be applied based on user behavior (@wario is suggesting modulating by how recursive the borrowing scheme is)
  4. How to distribute it to affected users. (@kybx86 proposed using COMP, other proposals involve DAI reserves. The most accurate to the true damages of the event would be to use the asset that was seized in false liquidations)

This is a strawman model that is intended to get the methodology for a direct computation of damages correct. It uses input values derived from @wario’s data, the minimum USD values for assets on the day of the exploit. A real computation would use on-chain data, but should be in the same ballpark. This was just to determine a good methodology and if we move forward we can work on using accurate data to determine the final raw damages result.

The model divides users into two classes. Those that would not have been liquidated using correct DAI prices and those that still would have. The damages for those that would have not been liquidated is the extra collateral that was taken due to the incorrect DAI price plus the liquidation penalty from the false liquidation. For those that would have been liquidated anyway, the damages are simply the delta between the liquidation penalty from the liquidation that would have occurred and the liquidation penalty that liquidation that did occur. Let me know if this sounds correct.

script: https://pastebin.com/DcsXXxcJ
output: https://pastebin.com/y9s6997E

The total raw damages from false liquidations comes to around $7.5M direct loss of user value. This model also takes into account DAI-DAI liquidations, which results in less direct damages for the “looper-whales”, which was an objection to the previous proposal, so that worked out nicely.

The counterfactual of who would have been liquidated is the trickiest part of this model. Using @wario 's data and coingecko prices, there are only 7 users that would have been liquidated if DAI prices were correct and only one had > 5 figures liquidated. Since this real computation of this counterfactual requires assuming no user transactions, then it may be fairer to ignore it as it will have relatively minimal impact. This is something to decide if we move forward with it.

Once we have a good method for computing raw damages, we can then decide, the other points (%, modifiers, distribution method).

Also per the discussion above, even if there was no manipulation (which seems extremely unlikely and can only really be determined through the legal system) then there was still an oracle failure leading to false liquidations (otherwise, why bother fixing it if its not broken?). Compensation is part of the fix.

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I would just like to clear up that this is not my data. What I provided was simply the state of liquidated accounts at block 11332733 taken from the Compound API’s account endpoint.

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Some follow-on thoughts. It seems 1) (and potentially some modifications from 2) and 3)), and solving 4) by drawing from the DAI reserves (while simultaneously derisking DAI), would go a long way to resolving criticisms brought to the previous compensation proposal that prevented its acceptance.

I would also like to mention the option of compensating in the original asset seized in the false liquidation as this would offset any opportunity cost damages not accounted for in my computation, but is as easily computable as USD is.

Factoring this in results in the following https://pastebin.com/9CmuhcsA

Next steps will be deciding on 2, 3 and 4 and crafting a new proposal.

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Compound must compensate ,its not the fault of the investor due to price manipulation.
Compound did not warn investor of the risk at their website otherwise i would have not used compound.

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Can you explain to me why it is not ok to supply USDC / USDT and borrow Dai? For example, people may want some Dai to supply into Uniswap as an additional asset pair, but didn’t want to actually trade their USDC for Dai so they borrow it. Is that not a valid use case / legit purpose? Is the only use case that is aligned with Compound's future to long / short a certain asset?

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It seems you are proposing that people would want to pay 5.4% interest to the Compound protocol in order to borrow one stablecoin using another stablecoin as collateral to provide liquidity to Uniswap. Seems like a pretty bad financial decision to me. This contrived example also does not explain why the people doing these stablecoin to stablecoin loans would then do it recursively again and again.

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This is actually a very common trade for Dai. Arbitrageurs borrow Dai frequently with the intention of selling it high and buying it back lower, or vice-versa. This trade is the primary method by which Dai keeps its soft-peg to the USD. If the annualized return of arb’ing the Dai peg is greater than the APY of the loan, the arbitrageur makes money. Note that in theory this trade could be put on for any pair of stablecoins.

I’m not saying that this point is particularly relevant to this conversation, but it can make sense for traders to use stable assets as collateral for loans against other stable assets.

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Why wouldn’t they just mint DAI from the Maker protocol itself given that the stability fee for minting DAI with USDC collateral is currently 0%? I understand it could be argued that some uses cases exist for wanting for borrow DAI with USDC collateral, like the shorting DAI example explained some posts above, but being real that is not what is happening here.

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The stability fee on USDC was 4% up until last week. Other platforms can offer better LTV and different incentives. I’m not saying it made sense in this specific situation, just that money markets of exclusively stablecoins can exist organically.

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True, point taken. I still maintain that this is obviously not what is happening here, what is happening is an a clear exploitation of the COMP distribution program. And it’s also mostly done by supplying and borrowing the same stablecoin asset where this use case does not apply.

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I don’t know why this is a bad financial decision. Maybe I am just dumb? Right now Dai interest is 5.4% but it wasn’t that high before. It was about 4%. You also earn interest when you supply USDC and it’s around 2 - 4%. And you always supply more than you borrow. So net you are not really paying much interest, if any, borrowing Dai, as long as you supply enough USDC. And you can end up with diversified Uniswap pairs. And you earn a little bit of Comp on the side. Maybe not the smartest thing to do with your stablecoins; there are probably better ways to get Dai out there; but it is easy enough to do it on Compound, and it seems like a “safe” enough strategy with some returns because you have the least risk of being liquidated since both sides are stable coins… but obviously not lolllll. And now you get fucked, plus you also get people trying to paint you as a “yield farmer”.
In general I just find your definition of “yield farmer” very up to your own interpretation of what you think is ok vs not. Why do you get to define what is the “right purpose” when you borrow an asset? Also, let’s be real, Compound giving out Comp for participating users is in the equation for everybody, not just the “yield farmers”. I don’t know why you think some people are more noble than others.

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Agree with you.
“Healthy” and “Unhealthy” strategies are a subjective terms. In case that DAI went in the opposite direction, we will be talking about a “great” strategy.
For COMP holders stablecoin pair farming is a great thing when TVL and market cap come into question, but when manipulation on protocol happens and users are robbed then they put the blame on the user’s risk management.
I personally dont use this strategy, but if protocol allows users to perform that strategy to pump TVL and after error declare that strategy is “unhealthy” then we have problem in protocols incentives mechanism.
In this case of manipulative liquidation, it is obvious that the position of the COMP holder is defended to the detriment of the user.
If a protocol error has occurred why do only users have to bear the cost of that error?
In every future hack/manipulation/explotation we can expect the same reaction from COMP holders?

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You are ignoring the fact that most of these farmers are using the exact same stablecoin to supply and borrow, including the largest amount of capital in this set of liquidations that is just 1 such farming operation, with 100M+ of DAI and only around 16M USDC collateral for its 80M+ DAI loan. I don’t get to define anything, I just point out that these operations are exploiting a program intended to distribute COMP governance tokens to its users. If you don’t see how this practice is exploitative, I honestly don’t know what else to tell you, but a protocol that only allowed these types of same-asset wash loans would be absolutely useless so it can’t be its intended purpose.

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You great point the problem and question are why Coumpound tokenomics allow that action?
I think that stablecoin pair farming work great for COMP holders, because it has a positive effect on key metrics and COMP price.
How big would a market cap be without stablecoin farming?
With a given interest rate on non-stablecoin crypto-assets, Compound would not perform that well.

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Well so I am telling you I am in this discussion because my address is classified by you as having a recursive factor of > 0.5 so obviously I am a recursive yield farmer, but I am not. I only supplied USDC and borrowed Dai, and all the capital I supplied was not leveraged again, so your method has some flaws. Sure there are people that may be “exploiting the program” whatever the definition that is, but just trying to tell you there are also possibly usecases outside your limited imagination, and it is not appropriate to classify people using a flawed blanket policy.
I am also not sure why I need to be here defending myself or others. It almost feel like people being raped and then having to argue with people whether they are supposed to be raped because they exposed too much skin or are out drunk late at night etc. It is a distraction of this particular Dai incident as well. If you are not happy with recursive yield farmers, you should propose to change the incentive of the program and yield farmers will naturally move away. Investigating the effected users in this incident and not compensating their losses based on a random rule is not the solution here.

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