DAI Liquidation Event
The Compound protocol uses Coinbase Oracle for account liquidity calculations, anchored to within 20% of the Uniswap time-weighted average price. Any Ethereum address can post the signed/reported price on-chain, which allows for a permissionless and autonomous price feed that rapidly de-risks accounts.
From approximately 12:00am to 1:00am PT on Thanksgiving morning, the price of DAI on Coinbase Pro began trading at increasing prices and volume across the DAI/USDC, DAI/USD, and ETH/DAI pairs, reaching as high as $1.30. This coincided with a decline in ETH prices globally, of approximately 8% during the same time period.
DAI/USDC; ETH/DAI; 24h volume 25m DAI
During this period, 85.2m DAI were repaid by liquidators, who seized collateral from addresses borrowing DAI. In the largest liquidation, an address “yield farming” had 46.2m DAI repaid, and 49.8m DAI seized.
In total, 124 addresses of 225,793 were impacted; there are no under-collateralized accounts in the protocol; and all markets are healthy. However, addresses that were liquidated feel that the risk parameters & price feed were too aggressive / onerous.
Fundamentally, the protocol and price feed performed as designed; real trading, on America’s largest exchange, was used to aggressively reduce the risk of borrowers in the protocol. What was unexpected was the adverse market condition that occurred, how quickly it occurred, and for many users, that it could occur at all.
The DAI market on Compound, with 1.6 billion DAI supplied and 1.3 billion DAI borrowed, has grown far larger and more rapidly than anyone had anticipated. The Compound DAI market eclipses both the underlying DAI market, the liquidity on exchanges, and the global trading volume of DAI by a vast margin. This exact risk is at the core of the Gauntlet Market Risk Assessment.
This liquidation event should be a wake-up call to calibrate the protocol, which has scaled rapidly over the summer. I recommend that the community discuss what steps, if any, should be taken to prevent similar liquidations from occurring in the future.
Broadly, potential changes could include:
- Modifying the DAI market parameters, including the Borrowing Cap, to reduce the size of the DAI market relative to trading venues
- Modifying the DAI price feed by either tightening the anchor bounds, capping the price (e.g. to 1.05), or utilizing additional reporters
- Removing the reporter in some/all cases and relying only on Uniswap, or taking an entirely different approach
Additionally, impacted addresses have been vocal about being compensated for their liquidation costs–the governance process is capable of allocating COMP, and should analyze whether this is reasonable.