Using the 2.8% seize fee for B.Protocol backstop automatic market maker (B.AMM)

Ideas
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(Disclosure, I am the founder of B.Protocol)

Recently our community introduced a novel automated market maker algorithm that can handle liquidation of big amounts, and has automatic rebalance procedure.

We are proposing that compound protocol would deposit funds (potentially from the 2.8% seize fee) into a deployed contract of the system, which will offer all supported compound debts with 4% discount (over compound’s oracle).
Further, the contract will only support liquidations over compound.
After each liquidation, an automatic rebalance process will start.

Such setup will guarantee that if X amount of token C is deposited, then liquidations of up to X amount of C token are guaranteed to succeed, even if all of defi liquidity is temporarily drained.

Offering liquidity with 4% discount give some room to incentivise callers to the liquidation function. And fee that is being charged during the rebalance process.

More about the B.AMM

The backstop automatic market maker (B.AMM) serves as a buffer of liquidity, and offer liquidity with premium (e.g., 4%) over market price (where the market price is determined according to chainlink price feed).
Once a liquidity is taken, the buffer position becomes imbalanced, and it offer the imbalanced inventory for sale, with discount over market price.
Where the market price is again determined by chainlink oracle, and the the actual discount is determined by a smart contract formula, which takes into account the inventory imbalance.

The authors of the whitepaper performed a simulation on how it would perform. The benchmark was set to be Binance futures USD-ETH market. Which had $1B of liquidations that month.

The figure below shows liquidations where the y axis units are 100 million USD, and the x axis is time in 30 minutes resolution

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The whitepaper assumes certain delay in the DeFi liquidity recovery time, and shows how much will be needed to cover such volume of liquidations

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Further, it assumes 5% premium, and shows that overall, in the month of April 2021, this strategy could have been profitable

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A preliminary implementation (for a different platform) is available here.

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Backstop liquidity providers are key participants in the CeFi world. It’s great to see that B.Protocol takes this initiative to build a protocol for providing backstop liquidity for lending protocols in DeFi. In the forum post, B.Protocol proposed that Compound protocol can deposit a fraction (2.8%) of the liquidation seized amount to the B.protocol contracts as the backstop liquidity, instead of adding it to the cToken reserves (acts as insurance for protocol insolvency and owned by COMP holders).
The whitepaper outlines the details of B.AMM liquidations mechanics. However, some open questions need to be clarified.

  • Backstop liquidity asset composition
    The post suggests that Compound can deposit a fraction of the liquidation seized assets to B.AMM. However, most of the seized assets are volatile collateral assets. If this proposal is implemented, the majority of the assets deposited from Compound don’t directly help provide backstop liquidity since most of the assets in the pools are not borrow assets. Is there any built-in “portfolio rebalance” mechanism to ensure that the assets are mainly composed of the borrow assets? According to the whitepaper, the current rebalance mechanism is only for selling liquidation seized collateral assets.
  • Pooling user funds to Uniswap V2
    The whitepaper mentions that “Pool user funds at a yield-bearing platform, e.g., Uniswap V2”. Based on the description, COMP token holders who technically own the reserve implicitly take the impermanent loss risk of being a Uniswap v2 liquidity provider. How do COMP token holders express the level of the risk they want to take? Or what yield-bearing platform/asset pairs to integrate with?
  • Incentive for bite transaction
    The whitepaper mentions that “a bite transaction can be invoked by anyone”. What’s the incentive for a user to execute a bite transaction?
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Thanks a lot for taking the time to read the whitepaper and respond.
Before replying to the specific questions, I would like to emphasize that B.Protocol indeed aims to build a more efficient backstop for DeFi lending platforms that will improve capital efficiency of lending platforms.

However, the current proposal/idea is very narrow focused in its scope. Typically we offer projects to fully rely on B.Protocol for the liquidation process, and offer better capital efficiency (i.e. collateral factor) to the users. Here we simply suggest to use our developed technology only with the emergency funds without any change in the core Compound protocol.

The B.AMM technology do not offer any novelty for simple portfolio rebalance. However such rebalance by its nature could be semi-manual. E.g., via a governance portfolio committee. Either way, it seems like this issue should be addressed by the Compound community even if the funds are not deposited at the B.AMM (as it is better not to hold the emergency funds in volatile assets).

Uniswap is just an example, and in this case maybe just depositing the funds to compound is the most natural thing to do.

This is a valid question. New protocols like liquity.org and MakerDAO liquidation 2.0 offer such incentives, and those could be used also in compound (e.g, offer 0.5% of liquidation size to the tx invoker, and this can be done in the B.AMM, outside of Compound’s core protocol).

There are also automated serviced such as Keep3r, Chainlink keeper, and Gelato that could also help ensuring such txs are invoked.

Moreover I would argue that to some extent, as in the absence of B.Protocol those funds were meants to seat idle anw, a missed liquidation is not necessarily a risk, as it would be missed also with the current status quo.
Nevertheless I do believe it is only a matter of time before DeFi protocols would decouple the trading incentive in liquidations from the tx invocation incentives, and this seems to be the new norm.

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