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:
- Reimbursement to users before clarity on when/how the underlying issue would be fixed.
- Reimbursement denominated in COMP to affected users may not necessarily align with the objectives of COMP usage or COMP holders.
- 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.