[Gauntlet] - Risks and Considerations Pertaining to OEV
Gauntlet appreciates the ongoing discussion and the recent RFP regarding OEV provider selection. To support the decision-making process and provide additional context for the current snapshot vote, we are sharing our analysis, relevant benchmarks, and potential friction points for successfully implementing OEV.
Disclaimer: The community should conduct its own independent review and analysis before making a decision. The considerations below are provided given that Gauntlet is a community delegate. OEV selection is not directly part of Gauntlet’s risk management mandate with the Compound DAO.
High Latency of Liquidations
Compound’s liquidation mechanism exposes the protocol to duration risk of holding the collateral assets while repaying the borrower in base asset. The price trajectory of the collateral asset before and post calling the absorb() is pivotal to succesfully liquidating the collateral without bad debt to the protocol.
The Ask Price is determined by the price feed and is a function of storeFrontPriceFactor and the asset’s LiquidationFactor. Gauntlet has observed elevated latency in liquidation execution during periods of high volatility, especially on L2s. These delays increase the risk of negative reserve generation or even bank-run scenarios.
- The market downturn of 8/12/24 revealed low liquidity participation on L2 chains, correlating to greater processing time for collateral purchases - this was more pronounced on Base and Optimism comets.
- The market downturn of 2/3/25 showcased that this trend still persists where WETH and wstETH liquidations continued to show elevated latency.
OEV integrations should prioritize bootstrapping a robust searcher ecosystem, and pilot deployments should focus on L2s, especially Arbitrum, Base, and Optimism, where historical liquidator participation has been low and latency high.
Maximum per block price deviation vs Liquidation Profitability
The value of absorbed collateral can shift from block to block. If the collateral’s price falls by more than a certain threshold (y%) between the time it is absorbed and sold, the protocol can incur losses.
The protocol is protected from loss if:
Refactoring the equation to solve for y, we get:
This defines the maximum permissible price drop between absorption and sale before the liquidation becomes unprofitable.
Historical Price Drawdown Analysis
The below visualizations show the distribution of Oracle price drawdowns against Number of Blocks.
The table summarizes the maximum negative oracle price updates between consecutive blocks and over rolling windows of 3 and 5 blocks, measured across the most volatile periods from 2022 to 2024:
| Token | Maximum Oracle Price Drawdown Between Consecutive Blocks | Maximum Oracle Price Drawdown Between 3 Consecutive Blocks | Maximum Oracle Price Drawdown Between 5 Consecutive Blocks | y |
|---|---|---|---|---|
| WBTC | -2.84% | -3.09% | -4.47% | -4.25% |
| WETH | -4.77% | -4.77% | -5.02% | -2.06% |
| LINK | -3.91% | -4.45% | -7.69% | -7.57% |
| COMP | -12.32% | -12.32% | -12.32% | -11.76% |
| UNI | -5.76% | -5.76% | -9.1% | -7.57% |
This data demonstrates that larger drawdowns are more likely over multi-block windows. The y is the price drop between absorption and sale of collateral below which bad debt can materialize. While the block-to-block drawdown is still below the thresholds compared to y , except for WETH (Pending increase in Liquidation Penalty) and COMP, the price drop over rolling 5 block window is already lower than y for all assets. We therefore recommend that OEV enabled liquidations should take no longer than 3 blocks (~36s on Mainnet) given the historical price drawdowns and relative price thresholds to materialize bad debt.
Recommendations
While maximizing OEV revenue is important, liquidation efficiency and risk mitigation should be prioritized to protect the protocol and its brand. To that end, we recommend:
- Prioritizing OEV providers with a proven, responsive searcher network.
- Emphasizing piloting integrations on L2s first, especially Arbitrum, Base, and Optimism.
- Ensuring liquidation latency remains under three blocks.
These guidelines will help ensure OEV integrations add value without increasing systemic risk.