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[Dapp Pocket] $100 million in assets unexpectedly liquidated, should Compound compensate?

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[Dapp Pocket] $100 million in assets unexpectedly liquidated, should Compound compensate?

Dear DeFi enthusiasts,

This week, Compound governance initiated a vote on whether to compensate for Dai liquidation losses, with a total compensation of up to 55,000 COMP, equivalent to around 200 million NTD. It's interesting to note how little attention this received compared to the significant Dai liquidations three weeks ago! Let's discuss the ins and outs of the event and whether compensation should be provided.

Other headlines this week include: UMA and YAM Finance collaborating to launch Degenerative Finance; Uniswap releasing new features and interfaces in V2; Aave V2 initiating a new round of governance proposals, including separation proposals and voting rights.

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In the perspectives section, we've selected Messari's Ryan Selkis' thoughts on his research paper being delisted by exchanges; Uniswap's Hayden Adams hinting at the importance of ETH L2 scalability through data; and Compound's Robert Leshner exclaiming that this governance vote is too controversial, and he has to abstain!

Our Viewpoint

$100 Million Asset Liquidation Incident, Should Compound Compensate?

What Happened with Compound Three Weeks Ago?

On November 26th, Coinbase Pro allegedly encountered a malicious attack, causing the price of Dai against the US dollar to surge by 30% within an hour, reaching $1.3. The Dai price they provided happened to be the sole price source for the lending platform Compound. Consequently, many DeFi users borrowing Dai on Compound were liquidated due to collateral being overdrawn, resulting in a record-breaking over $100 million in assets liquidated within 24 hours.

What Caused the Issue with Compound?

Unlike the Black Swan event in March where liquidation crisis occurred due to market-wide price volatility, this time on November 26th, there was no fluctuation in Dai's market price. Except for Coinbase Pro, most exchanges did not show the Dai uncoupling from the US dollar. Although Compound has a +/- 20% safety range with Uniswap, Uniswap's Dai trading price also experienced uncoupling. This led to suspicions that the Dai price change was intentionally orchestrated, with many attributing it to an oracle attack.

Compound's Oracle Pricing Mechanism

Compound's price feed comes from Coinbase's Open Price Feed. This pricing structure involves off-chain Reporters declaring coin prices, which are then posted on-chain by Posters and communicated to the platform. While Compound had prepared for a "less than 20% variance compared to Uniswap" measure, it did not work as Uniswap's Dai price also fluctuated, manipulating the platform's Dai price due to the oracle attack.

Should Compound Compensate Users?

This week, the Compound community officially initiated a compensation vote, with specific details regarding compensating the penalized portion of liquidated users' assets. Under the agreement, liquidated assets will be subject to an 8% penalty. With about $85 million in liquidated Dai, the 8% penalty amounts to $6.8 million, approximately equivalent to 55,000 COMP tokens, which has minimal impact on COMP's currency inflation. The community vote resulted in rejecting the compensation proposal. However, opinions were divided, with even founder R. Leshner publicly stating this was the most controversial vote he had encountered. Here, we attempt to explore this issue from different perspectives.

Compound Users

The responsibility for this liquidation incident does not lie with the users. It is quite unfair for a user who trusted Compound to suffer losses when the chosen pricing mechanism on Compound experienced a single point of failure. Users not only lost money but also lost trust in this lending platform. If it were a liquidation caused by a global collapse in currency prices like the 3/12 event, then borrowers would be at fault, but since Dai did not actually fluctuate and the issue stemmed from Compound itself, it is only natural for Compound to be accountable to the users. Additionally, the amount of loss incurred by users, based on the liquidation price, gas fees, etc., actually exceeds 8%, with some reporting losses as high as 30%; therefore, compensating 8% seems quite basic.

Compound Project Team

Compound must be aware of the risks of a single point pricing, but adopting a multi-point pricing system like Chainlink would entail higher costs, potentially reducing profits, and the rates offered may deteriorate, diminishing competitiveness. In simple terms, regardless of the reasons Compound chose a single-point pricing, it holds primary responsibility for this incident, so we believe compensation is necessary. Compensation not only covers user losses but also declares that Compound stands with the users and regains everyone's trust.

Conclusion: Compound Must Address the Oracle Issue

Regardless of the community's decision on compensation, this is only a short-term solution. Moving forward, Compound governance urgently needs to decide how to optimize the pricing mechanism, which is the fundamental way to ensure sustainable development of the protocol. Proposed solutions include integrating other oracle price feeds such as Chainlink, Nest, Maker, decentralized oracle solutions; or increasing the sources of the current Open Price Feed used, making Coinbase Pro no longer the sole price indicator. We believe that in the upcoming proposals, Compound will swiftly move in these directions and regain user trust. Conversely, in the current proliferation of DeFi protocols, if Compound continues to retain this risk of liquidation, it will gradually lose security-conscious users.

Two, Major Events This Week

✨ Headlines This Week

Compound Proposal for Compensating Dai Liquidation Losses Rejected

DeFi lending platform Compound proposed Proposal 32, aiming to distribute 55,255 COMP tokens as compensation to victims of the Dai liquidation incident on November 26. Supporters included DeFi Rate, Synthetix founder Kain, InstaDapp, and others. However, the proposal did not pass after the community vote.

UMA and YAM Finance Collaborate to Launch Degenerative Finance

DeFi infrastructure UMA and YAM Finance collaborate to introduce the product suite Degenerative Finance. This suite involves recent uGAS contract transfers and upcoming DeFi arbitrage, hedge products. In the first collaboration project, YAM will take over uGAS to enhance user experience and launch a uGAS investment portfolio management interface by December 21, introducing a series of uGAS contracts including uGAS-FEB21 and uGAS-MAR21, among others.

Unitrade Releases V2 Version with New Features and Interface

Smart trading platform Unitrade based on Uniswap (TRADE) has launched the V2 version with a new interface. The latest features include enabling traders to search for tokens, set limit orders, set buying or selling prices, set Gas Fees, and more. Unitrade indicates that there are still some issues to address and optimize. The main product Unitrade.app was released on December 8, with the limit order functionality set to gradually open by the end of December and early January.

PoolTogether Implements Shared Winning Mechanism

As per the community vote three weeks ago, DeFi lottery protocol PoolTogether officially launches a shared winning mechanism. This means that depositors in the weekly Dai pool will have their winning probability tripled directly. Prizes are divided into first, second, and third prizes, with the first prize winner receiving 1/3 of PoolTogether interest earnings and all Loot Box token earnings; second and third prize winners each receive 1/3 of PoolTogether interest earnings.

Aave v2 New Governance Proposal, Including Separation of Proposal and Voting Rights, Voting Strategies, etc.

DeFi protocol AAVE community governance initiates a new AIP AAVE Improvement Plan, including: 1. Allowing non-core team members to submit governance proposals. 2. Separating AAVE holders' proposal rights from voting rights, allowing Hodlers to delegate proposal rights while retaining voting rights. 3. Possibly opening up voting rights for holding different forms of AAVE tokens in the future. 4. Setting Executors and Guardians to ensure the security of different user groups and AAVE, among others.

🚀 DeFi Protocols

🛠 Liquidity Mining

💰 Financing

Three, Industry Insights

Messari CEO Ryan Selkis: This humor-infused 2021 observation paper inadvertently involves Bitstamp, I apologize.

Uniswap Founder Hayden Adams: This data should clearly imply the importance of Ethereum Layer 2 scalability.

Compound Founder Robert Leshner: This is the most interesting and controversial Compound governance vote I've encountered so far.

Four, Data Metrics

This week's data covers the period from 2020/12/8 to 12/14. TVL (Total Value Locked) indicates how many assets are stored on the platform; IPY (Interest Per Year) is the current lent funds * annual interest, i.e., platform annual interest income. Data source: DeFi Pulse. (Unit: million USD)

Five, Weekly Memes