DAI Liquidation Event

Recent examples of protocols taking responsibility for their faulty oracles leading to false liquidation:

Nexo on Twitter: “Due to a third-party service anomaly, the $USDT price deviated from its market value & some Nexo clients’ balances were incorrectly liquidated. All incorrect liquidations will be reversed & your wallets’ balances will be restored shortly. We apologize for any inconvenience.” / Twitter

Celsius on Twitter: “Update - An error for $MATIC and $SNX price feeds from our 3rd party provider triggered margin calls earlier today. The issue is now resolved without any liquidations, and our team is working on resolving any margin calls that were issued as an error.” / Twitter

Looks like the ball is rolling in terms of fixing the oracle in another thread. Hopefully Compound can step up and do the same. These protocols took responsibility the day of, yet here we are 7 months later.

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Were there a DOT market on Compound… we all know what would have happened yesterday.

Crypto₿uzz on Twitter: “#Coinbase glitch has $dot down 77% https://t.co/kH67Ey5awl” / Twitter

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This is just laughable that the Compound team are still ignoring this issue when it cost many users tens of thousands of dollars of losses, and that no fix has even been put in place preventing this from happening again.

I can’t believe anyone (let alone billions of dollars) trust Compound with their assets when there are such obvious flaws that could cause anyone using the platform safely to get liquidated even if they are using it safely, and paying attention to what’s going on in terms of asset prices in the general market. Especially now that they know the team will ignore the issue and not do anything to make it right.

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tens of thousands of dollars of losses

tens of Millions. 10% of user funds were falsely liquidated ($100 Million of $1 Billion) and that is not accounting for the fact that it was right before the bullrun kicked off, so liquidations may have been at prices a fraction what of what those assets are valued at now.

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No report was made about that event. Ignoring this exploitation is a political decision of several VC funds while Gauntlet and founder wash their hands and talk fairy tales about decentralization.

I am very likely going to end up suing Compound due to the losses here and failure to protect user funds. If anyone wants to join the suit feel free to message me.

If the Compound team had done something at all to make this right, even if not fully rectifying the loss, I would have been fine with it. Reimbursing the 8% liquidation fees would have been totally reasonable in my opinion, despite “the longer term losses” folks suffered due to the rapid increase of the non stable assets since these liquidations took place.

But doing nothing and saying that things worked as designed, when there were clearly problems with the platform, and now making the changes that we requested many months later while basically ignoring the damages we incurred that led to the changes is just infuriating and rubbing salt in the wound.

Not to mention the Compound community furiously applauding the guy who put the proposal together and giving him $150k for his hard work to “improve the platform”.

This is a total slap in the face to anyone who lost funds during this attack and was just “using the platform as designed”. I myself was borrowing DAI against other stables because I didn’t want to pay to swap them. It would have been (and still is) cheap to address this issue with:

  • any of the various proposals put forth in this long thread (my preference is this one)
  • an apology to the people who were affected
  • and a thank you for bringing this serious problem to light that helped make the platform stronger & better in the long run

Instead they just ignore it. Not sure why that is the chosen approach, when the negative publicity of a lawsuit far outweighs reimbursing the non-farming addresses in the list. Indeed, the largest wallet in this list of affected people seems to have stopped using it entirely. Reimbursing the rest is a tiny cost to Compound at this point.

I am quite serious about this and hope that my comments bring this discussion back online so we can get a resolution in the near future and I don’t have to take any additional action to get reimbursed for my stolen funds.

@rleshner @eddylazzarin @mike-u410 @hayesgm @franklin-pantera

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This was not ignored what so ever. Proposal 32 was made to reimburse users who lost funds and the proposal failed. The Compound protocol is run by a community not by an individual point of contact.

It is totally possible to revive this thread and get it done now that the oracle has been changed. @kybx86 have anything to say now?

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I would not agree with that. The redesign of the oracle price feed indicates that damaged users are not to blame for being liquidated (as some members have argued). What about users with liquidated Ethereum positions? The difference between the current ETH price and the price from 7 months ago is quite large.

Well 8% would have been the minimum I’d expect.

While it sucks that some of the assets that got liquidated went up in value that isn’t really Compound’s fault. You could have taken the DAI you ended up with and rebought your other token if you so chose to.

Conversely, if they had gone down in value after, would you reimburse Compound for it?

I think reimbursing the liquidation fees at a bare minimum would go a long way towards appeasing people. Ideally they’d reimburse the liquidation fees + the amount of DAI that people got shorted since we “bought” it at 30% above market value. I’m sure there is enough in the treasury to do that, and if not they ought to do it with COMP.

How anyone continues to have faith in a protocol that doesn’t protect it’s users and doesn’t take responsibility for it’s mistakes is beyond me

the fact is that I would have those funds today in case the protocol worked properly.
A protocol error caused that loss

I already did it, 7 months IR + 8%

No idea why you’re taking a swing at Getty. He took it upon himself to help improve the oracle situation, this is a benefit to all users.

This does not pass the straight face test :slight_smile: Take some responsibility for being a leveraged farmer.

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I was not a leveraged farmer. I was not even leveraged. I was borrowing DAI to farm on another site against my staked USDC. Totally ridiculous to get liquidated in this instance.

I’m not taking a swing at Getty. Just pointing out that the platform seems to be rewarding him fixing this problem, but not doing anything at all to help those of us who actually were hurt by it

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I am in agreement here. If this is not satisfactorily resolved I will join you in pursuing legal action, so feel free to loop me in.

That being said, I believe we should give those that were against the compensation proposal by reason of the fix to the oracle issue out prioritizing victim compensation to be true to their word.

Now that the protocol failure has been resolved on the technical level we may revisit the topic of compensation for users affected in said protocol failure.

I think your proposal is reasonable, however I would suggest using my computation of damages over the original flat 8% as it is more accurate. Other than that it sounds like the bare minimum that one would reasonably expect in a situation like this. Hopefully we can get @kybx86 back on board!

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Since the Oracle issue is solved, I would suggest the Compound management would look into the compensation issue. Robert @rleshner please publicly tell your opinions about the situation? If a new proposal would be made would you be for the compensation or against it?

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Reintroducing the Compensation Proposal: Nov 26th, 2020 Oracle Issue Affected Users in DAI Liquidations

Hello everyone,

This post is intended to reintroduce and improve on the compensation proposal (“Prop 32”) in December 2020. To recap, on November 26th, 2020 an unexpected increase in the DAI price to $1.30 on Coinbase Pro led to 85.2 million in DAI being liquidated.

The original compensation proposal did not pass an executive vote, with 680k COMP voting against and 212k COMP voting for.

On June 21, 2021, the Compound community passed an update to Compound’s oracle system. This update implemented Chainlink Price Feeds over a custom oracle implementation that relied only on Uniswap and Coinbase Pro. While not the sole purpose, the oracle update was a byproduct of the DAI liquidation event on November 26, 2020, that liquidated DAI borrowers due to an adverse and unexpected increase in the price of DAI on Coinbase Pro.

Additionally, at the time of Prop 32, the DAI market’s reserves lacked the capitalization to properly compensate users. The prior approach of Prop 32 was to use COMP from the Reservoir, valued using a time-weighted average price, to compensate users affected by the liquidations. However, thanks to Prop 31, which increased the DAI market reserve factor from 5% to 15%, today, the 14 million DAI in reserves is sufficient to cover the losses as originally calculated in full. The total expected compensation amount is approximately 6.8 million DAI based on the protocol’s 8% liquidation penalty.

The oracle fix and the increased DAI reserves address three key issues voiced by the community with the previous compensation proposal:

  1. Reimbursement to users before clarity on when/how the underlying issue would be fixed.
  2. Reimbursement denominated in COMP to affected users may not necessarily align with the objectives of COMP usage or COMP holders.
  3. Setting a precedent that tail-risk events should be subsidized with COMP.

A new proposal would focus on using the DAI market reserves to compensate users (though using COMP to compensate users is still an option). No COMP will need to be distributed under this model. Further, the reserve functionality of money markets was built for situations like these, where those unintentionally liquidated can be compensated.

Compensation is well within the capabilities of Compound governance today and will help give closure to a topic that’s still a point of ongoing discussion in the community and allow the protocol to move forward on stronger footing.

Maybe we can move forward with a proposal that will use DAI from the reserves to compensate those affected by November’s liquidations in full. What does everyone think?

Disclosure: For full transparency, I was one of the Compound users affected in the DAI liquidation event. I worked with the community to pass a reserve factor change to the DAI market and led efforts for Prop 32.

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I am fully in agreement with your reasoning and suggested resolution. It seems appropriate, and would go a long way towards rebuilding trust in the platform, and ensuring that Compound is a viable protocol that people can feel safe using going forward

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Correct me if I’m wrong, but isn’t the point of building reserves to protect lenders in the case of a bank run? Since the reserves would likely not be withdrawn by governance during a crisis, the reserves help ensure that there is always market liquidity (reserves equal to the borrow amount means that all lenders could remove there liquidity without issue). It also helps borrows by buffering the interest rates in extreme scenarios. With that being said, I would suggest that if we compensate users, we should issue them COMP instead of touching reserves. Building reserves is part of the long term health of the protocol and the reserve factor is the only way to capitalize them at the moment. In the spirit of the name of the protocol, we should lean into the Compound interest and let the reserves grow untouched as long as we can.

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Why? What’s the reason that it will pass now rather than before?
@eggbagels

Correct me if I’m wrong, but isn’t the point of building reserves to protect lenders in the case of a bank run?

Well, yes, but also to let borrowers borrow more if there is not enough liquidity

Hello fellow community members. I am happy to see this topic being discussed again. I manage an investment advisory firm in the US and I have been helping family offices and ultra-high net worth clients experiment with DeFi. A handful of these clients were borrowing DAI on compound last November and were caught up in the liquidation. None of them have computer science backgrounds, but all of them individually reached the conclusion that a $1.30 DAI price was the result of manipulation and not natural market forces. Since this event I have been consistently fielding questions as to why I continue to label Compound as a blue chip DeFi protocol and why I continue to recommend its use to clients. I want our firm and our clients to stay involved with Compound because I believe the community leaders at Compound are among the most innovative in the industry and that they have pioneered market designs and governance features that have been widely replicated by other projects in the ecosystem.

I am comfortable with the thoughtful and slow moving approach that the community takes towards managing Compound. However, the optics continue to worsen as we see other DeFi protocols suffer exploits that are very rapidly addressed and reimbursed by governance. A few examples are Yearn (February, 10M DAI), Rari (May, $10M in ETH) and ThorChain (July, 4000 ETH). Of course the list goes on and this sets a precedent of how users and governance tend to treat each other in this new industry.

For all of my affected clients, the money means very little as we were responsible in sizing these experiments. The more important aspect is the tone this sets with those affected regarding Compound’s reputation. On Wall Street, reputation is all you have and once it is gone it may not be recoverable. I wanted to share this story and reiterate my admiration for this protocol and community. I believe the 6.8M DAI expense of putting this event behind us is a good deal in comparison to the protocol’s reserves and the $1.4B in treasury funds controlled by governance. Onwards and upwards!

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So it is not in the interest of COMP holders (early investors) for Compound protocol users to be paid in the COMP token?
Some users who were damaged in that event were liquidated positions in Ethereum, which are currently very large losses. Stablecoin compensation covers about 5% of the actual losses for these users. and represents only the good intentions of the community and the fact remains that the affected users were simply unlucky.
Now the question is what can users expect if a similar situation occurs in the future?
To me this looks like a traditional casino and a protocol like Compound does not need such a reputation.
If community members think 8% is fair compensation I will respect that but if the liquidations happened with a DAI price of $ 1.3 do you really think that’s fair compensation?
These are protocol users who are also the owners of part of the protocol (probably according to the ideology used as promotional material) and such decisions will best show what kind of relationship as users we can expect.