Liquidations: DeFi on a Knife-Edge

Pérez, Daniel; Werner, Sam M.; Xu, Jiahua; Livshits, Benjamin

doi:10.1007/978-3-662-64331-0_24

Cited by 34 publications

(28 citation statements)

References 12 publications

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“…Kao et al [23] and ZenGo [37] are to our knowledge the first to have investigated Compound's liquidation mechanism (the third biggest lending protocol in terms of USD at the time of writing). Perez et al [27] follow up with a report that focuses on additional on-chain analytics of the Compound protocol. DragonFly Research provides a blog post [16] about the liquidator profits on Compound, dYdX and MakerDAO.…”

Section: Related Workmentioning

confidence: 99%

An empirical study of DeFi liquidations

Qin

Zhou

Gamito

et al. 2021

Proceedings of the 21st ACM Internet Measurement Conference

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Financial speculators often seek to increase their potential gains with leverage. Debt is a popular form of leverage, and with over 39.88B USD of total value locked (TVL), the Decentralized Finance (DeFi) lending markets are thriving. Debts, however, entail the risks of liquidation, the process of selling the debt collateral at a discount to liquidators. Nevertheless, few quantitative insights are known about the existing liquidation mechanisms.In this paper, to the best of our knowledge, we are the first to study the breadth of the borrowing and lending markets of the Ethereum DeFi ecosystem. We focus on Aave, Compound, Mak-erDAO, and dYdX, which collectively represent over 85% of the lending market on Ethereum. Given extensive liquidation data measurements and insights, we systematize the prevalent liquidation mechanisms and are the first to provide a methodology to compare them objectively. We find that the existing liquidation designs well incentivize liquidators but sell excessive amounts of discounted collateral at the borrowers' expenses. We measure various risks that liquidation participants are exposed to and quantify the instabilities of existing lending protocols. Moreover, we propose an optimal strategy that allows liquidators to increase their liquidation profit, which may aggravate the loss of borrowers. CCS CONCEPTS• General and reference → Empirical studies; Measurement; • Applied computing → Economics.

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Section: Related Workmentioning

confidence: 99%

An empirical study of DeFi liquidations

Qin

Zhou

Gamito

et al. 2021

Proceedings of the 21st ACM Internet Measurement Conference

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show abstract

“…only if their account is overcollater-ized). As blockchains typically do not provide strong identities, but pseudonyms [12], users' actions are difficult to be regulated under a jurisdiction, which makes collateralization the main protection mechanism against adversarial behaviours [27]: an agent can only borrow a quantity of tokens worth less than the amount of collateral they deposited. This mechanism and others (e.g.…”

Section: Lending Pools and Price Modelsmentioning

confidence: 99%

SoK: Lending Pools in Decentralized Finance

Bartoletti

Chiang

Lafuente

2021

Lecture Notes in Computer Science

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Decentralised Finance (DeFi) applications constitute an entire financial ecosystem deployed on blockchains. Such applications are based on complex protocols and incentive mechanisms whose financial safety is hard to determine. Besides, their adoption is rapidly growing, hence imperilling an increasingly higher amount of assets. Therefore, accurate formalisation and verification of DeFi applications is essential to assess their safety. We present a tool for the formal analysis of one of the most widespread DeFi applications: Lending Pools (LP). This was achieved by leveraging an existing formal model for LPs, the Maude verification environment and the MultiVeStA statistical analyser. The tool supports several analyses including reachability analysis, LTL model checking and statistical model checking. We show how the tool can be used to statistically analyse several parameters of LPs that are fundamental to assess and predict their behaviour.

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“…The synthetic asset tracks an external price feed ('oracle') which is provided to the blockchain. However, external price feeds are prone to technical issues and coordination problems leading to staleness in case of network congestions or fraudulent manipulation [20].…”

Section: Derivativesmentioning

confidence: 99%

“…Because application designers seek to lower the aggregate transaction costs, protocol fees, slippage or impermanent loss through algorithmic financial modelling and incentive alignment, stakeholders must carefully observe the state of the blockchain network. If a period of network congestion coincides with a period of volatility, the application design may suddenly impose excessive fees or penalties on otherwise standard actions such as withdrawing or adding funds to a lending market [20].…”

Section: Transaction Costs and Network Congestionmentioning

confidence: 99%

“…Providing liquidity in the form of IOU tokens, to these secondary market creates additional (3rd generation) liquidity shares, generating additional fees for the liquidity provider. As a consequence of the increasingly integrated market for liquidity shares, a rapid depreciation of the source asset for the liquidity shares may trigger a sequence of cascading liquidations, as the market struggles to price in any rapid changes in the price of the source asset [20], [22], [23].…”

Section: Application Interoperability and Systemic Risksmentioning

confidence: 99%

See 1 more Smart Citation

An Introduction to Decentralized Finance (DeFi)

Jensen¹,

Wachter²,

Ross³

2021

CSIMQ

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Decentralized financial applications (DeFi) are a new breed of consumer-facing financial applications composed as smart contracts, deployed on permissionless blockchain technologies. In this article, we situate the DeFi concept in the theoretical context of permissionless blockchain technology and provide a taxonomical overview of agents, incentives and risks. We examine the key market categories and use-cases for DeFi applications today and identify four key risk groups for potential stakeholders contemplating the advantages of decentralized financial applications. We contribute novel insights into a rapidly emerging field, with far-reaching implications for the financial services.

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Liquidations: DeFi on a Knife-Edge

Cited by 34 publications

References 12 publications

An empirical study of DeFi liquidations

An empirical study of DeFi liquidations

SoK: Lending Pools in Decentralized Finance

An Introduction to Decentralized Finance (DeFi)

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