Liquidations: DeFi on a knife-edge

DOI10.1007/978-3-662-64331-0_24MaRDI QIDQ2147253zbMATH OpenOpenAlexFDO

Authors Yanyan Li

Publication date 22 June 2022

Full work available at URL https://arxiv.org/abs/2009.13235

Mathematics Subject Classification ID

Cryptography (94A60) Actuarial science and mathematical finance (91G99)

Abstract: The trustless nature of permissionless blockchains renders overcollateralization a key safety component relied upon by decentralized finance (DeFi) protocols. Nonetheless, factors such as price volatility may undermine this mechanism. In order to protect protocols from suffering losses, undercollateralized positions can be liquidated. In this paper, we present the first in-depth empirical analysis of liquidations on protocols for loanable funds (PLFs). We examine Compound, one of the most widely used PLFs, for a period starting from its conception to September 2020. We analyze participants' behavior and risk-appetite in particular, to elucidate recent developments in the dynamics of the protocol. Furthermore, we assess how this has changed with a modification in Compound's incentive structure and show that variations of only 3% in an asset's dollar price can result in over 10m USD becoming liquidable. To further understand the implications of this, we investigate the efficiency of liquidators. We find that liquidators' efficiency has improved significantly over time, with currently over 70% of liquidable positions being immediately liquidated. Lastly, we provide a discussion on how a false sense of security fostered by a misconception of the stability of non-custodial stablecoins, increases the overall liquidation risk faced by Compound participants.

Recommendations

• Speculative multipliers on DeFi: quantifying on-chain leverage risks
• SoK: lending pools in decentralized finance
• Formal analysis of composable DeFi protocols
• While stability lasts: A stochastic model of noncustodial stablecoins

Cites work

• Step on the gas? A better approach for recommending the ethereum gas price

Cited in

(7)

• How to exploit a DeFi project
• SoK: lending pools in decentralized finance
• While stability lasts: A stochastic model of noncustodial stablecoins
• Probabilistic framework for loss distribution of smart contract risk
• Mitigating decentralized finance liquidations with reversible call options
• Speculative multipliers on DeFi: quantifying on-chain leverage risks
• Attacking the DeFi ecosystem with flash loans for fun and profit

Describes a project that uses

Uses Software

• GASTAP

This page was built for publication: Liquidations: DeFi on a knife-edge

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2147253)