TLDR
We are proposing the integration of RedStone OEV solution for Compound which uniquely enables the protocol to capture liquidation revenue without sacrificing capital efficiency.
Overview
Compound DAO is undertaking multiple strategic initiatives:
The Compound DAO is facing a tradeoff between these two initiatives. If Compound integrates Chainlink SVR or API3, this may force Compound to lower CFs, and the product will suffer with respect to capital efficiency.
Chainlink SVR and API3 would both reduce the capital efficiency of Compound by imposing potential delays to liquidations, in turn this would force Compound to be more conservative with risk parameters. It is possible that the revenue captured by Chainlink SVR or API3 would be less than the potential interest revenue lost due to conservative CFs. In the worst case, Chainlink SVR or API3 could also cause bad debt, and create large reputational damage for the Compound DAO.
RedStone OEV is uniquely positioned to resolve this tradeoff. It captures value from liquidations, but can also allow Compound to increase CFs/capital efficiency. RedStone OEV does not impose potential delays to liquidations or data feeds—and allows for faster liquidation execution between oracle deviation thresholds using a quasi “pull” oracle model. By eliminating delays and lowering liquidation latency, RedStone OEV not only preserves—but can even enhance—Compound’s capital efficiency by allowing for higher CFs while also ensuring that the revenue captured from liquidations is maximized without compromising the protocol’s risk profile.
Playing this out, if lending protocols compete aggressively on CFs, asset listings, supply caps, and liquidation bonuses—eventually converging on similar parameters—the protocol with the fastest and most robust liquidation engine should face the least bad debt over the medium term, and provide the most value to users.
Opportunity
Integrating Chainlink SVR has put Aave at a competitive disadvantage with regards to insolvency risk, and capital efficiency. The Chainlink SVR solution notably presents a risk of delaying oracle updates and liquidations up to 6 blocks. As outlined in a recent report, the risks imposed by Chainlink SVR will force Aave to be more conservative in parameters such as CF, “while delayed oracle updates can increase risks, the analysis shows these risks can likely be effectively managed through well-calibrated parameter adjustments by integrating protocols.”
API3 OEV similarly has a worst-case scenario of 30 second delays to the underlying data feed and liquidations, so would also necessitate the integrating protocol to be more conservative in risk parameters.
RedStone OEV
RedStone OEV can provide similar value capture as Chainlink SVR or API3, but differentiates in the following ways:
- No risk of delays.
- Faster liquidations.
- Compatibility with any EVM chain.
No risk of delays:
If RedStone oracles detect any potential issues with the OEV auctions, they gracefully fallback to sending regular data feed updates without delay. This enables fallback non-auction liquidations to occur without delay. There is no requirement for an on-chain time-based fallback of 3-6 blocks like Chainlink SVR, or 30 second data feed delays like API3.
Faster liquidations:
RedStone allows liquidations to be triggered before regular data feed updates, in-between deviation thresholds and heartbeats. This would allow Compound to benefit from a hybrid “pull” + “push” oracle model without any code changes. In many cases Compound would now liquidate ~1 or more blocks before a protocol using a standard push oracle, allowing Compound to reduce insolvency risk.
Compatibility with any EVM chain:
RedStone OEV supports any EVM chain, so would allow Compound to begin testing this solution anywhere that Compound is deployed. On L2s with faster block times, RedStone OEV will be even more effective at triggering faster liquidations than other push oracles.
Conclusion
The currently discussed solutions (Chainlink SVR and API3 OEV) reduce Compound’s capital efficiency and thus reduce potential CFs by introducing delays that force conservative risk settings. RedStone OEV is the only solution that allows Compound to capture liquidation revenue without these tradeoffs. Its instant fallback mechanism and faster liquidation execution could enable Compound to safely increase CFs and reduce insolvency risk—all while capturing more value from liquidations.
We propose that Compound DAO considers integrating RedStone OEV. This solution not only meets both strategic objectives, but also positions Compound as the market leader in efficiency and safety.
Given RedStone OEV’s compatibility with any chain Compound is currently deployed to, we will defer to Risk Providers and Contributors on the optimal markets for initial implementation.