Solving the protocol risks during sell-cascade event

Understanding the sell-cascade event

Sell-cascade is an event during which the majority of the cryptocurrency market displays bearish volatility in double-digit percentages within a few minutes to a few hours. The most visible example is from March 13, 2020. On this day, both the cryptocurrency and traditional equity markets collapsed to levels not seen since the peak bear market of late 2018. While today, the average volatility is comparatively better than pre-2018 time. it remains a critical concern for decentralised financial lending projects, as a constant threat.

DeFi lending solutions, & the role of Liquidators

Most defi lending products rely on middlemen known as liquidators to liquidate distressed loans, i.e. when a loan reaches its liquidation price, the liquidators are the ones who undertake the responsibility of liquidating such loans, and repay the loan to the protocol. In exchange, to incentivise the liquidators, distressed loans are discounted between 5–15% depending on the protocol. While the presence of liquidators improves a protocol’s overall transparency, ergo credibility, it comes at a cost of significant risks during sell-cascade events, specifically when the price drops are steep with little to no reaction time for the liquidators.

Liquidators & Congested networks

During the sell cascade, as many cryptocurrency projects suffer significant value loss in dollar value, this adversely increases the probability of a healthy loan turning distressed; creating systemic instability. While many liquidators use bots to snipe liquidations, congested networks play the role of spoilsport delaying liquidations. This further creates a cascading effect through queued liquidations, evolving into a single point of failure. Unfortunately, no protocol in the market today be it Compound, Aave, MakerDao, or even the likes of Solend, Benqi are prepared to address such a critical edge but certainly possible case.

Protocol risk amplifier — Listing illiquid coins

While a sell cascade creates volatility even for the high liquid coins such as Bitcoin, USDT, USDC, It does not bode well for mid & low cap coins. Deposits/Loans must be facilitated only in the coin denominations with visible data of consistent supply-demand. Efforts must be made to avoid listing illiquid coins, even as a community service.

  1. They are difficult to liquidate.
  2. The demand for illiquid coins is seasonal.

Band-aid fix

In response to the market crash of March 13, Compound protocol increased the liquidation discounts from 5% to 8%, in addition to a few cosmetic changes. Aave’s reaction was also in line with Compound. The increase of discount percentage provides an additional cushion, it does not address the elephant in the room.

Open’s solution

With Open we have addressed the problem of sell-cascade risks at the protocol level. Before we dive into the solution, let us quickly narrow down the cause & effects a market crash has over the current defi lending products.

  1. Total reliability on liquidators creates a single point of failure.
  2. Network congestion creates a liquidation-cascades, ergo high-slippages.
  1. Chain-switch oracle to navigate through network congestion issues.

Join the conversations

  1. Discord: hashstack.community
  2. Twitter: twitter.com/0xHashstack
  3. BUIDL with us: github.com/0xHashstack

We are hiring

If you like what we are building, if you are up for a challenge to build complex, remarkable solutions for the DeFi, we are looking for you.

  1. Solidity engineer: Solidity + practical knowledge of EIP 2535.
  2. Product designer: 4+ years experience at a growth stage company with strong fundamentals, and good design sense.
  3. Backend developer: 4+ years professional experience building products serving 500,000+ users. Must be experienced with system design.
  4. Technical writer: If you can make sense of this post, avoid grammatical mistakes, and have at least 2+ years of experience, we are looking for you.

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