Temp Check: Liquidation Parameter Updates

Temperature Check
1

This temp check builds upon the initial Liquidation Parameter update temp check outlined here: https://gov.liqwid.finance/t/liquidation-parameter-updates/1156

During the past 48 hours following the drop in ADA price the protocol has had a wave of liquidation events, mostly from ADA backed loan positions. During volatile market conditions where collateral value is decreasing quickly it’s of upmost importance to have a properly tuned liquidation system. During the past few days the protocol successfully processed all liquidation transactions including under extreme chain loads and our core team will be releasing a report highlighting details of how the protocol performed during this volatile period in the coming days to weeks.

While the protocol’s liquidation engine performed as expected during this volatile period there are specific liquidation parameter updates the core team feels can make the system more robust during these moments of volatile price action and heavy chain load. These updates are ultimately aimed at protecting the lenders and all protocol users.

Update: After discussion with the core dev team this temp check and resulting proposal will focus on optimizing the window of profitability for liquidators to better account for liquidation events during volatile time periods.

After considering all factors and discussing with Liqwid liquidation bot operators in the Discord governance discussion channel, we’ve concluded the DJED hardcoded to $1 is the most potentially harmful component in the equation for net liquidation profit. Bot operators have reported skipping DJED loans due to the upwards de-peg in the price of DJED on DEXs creating a net loss scenario for them (even before accounting for slippage/fees on the DEXs when trying to repay large amounts). This is a dangerous position for the protocol to be in during steep ADA price drops due to the amount of outstanding DJED loans backed by ADA.

The situation is made worse by the fact DJED can’t be minted currently and even if it could the DJED protocol charges DJED minters a 1.5% fee plus some operational fee. As a result we propose removing the DJED $1 hardcode peg and allowing the price to float at market rate: this will create net profitable liquidations and secure the protocol especially during periods of strong market volatility.

Do you support these liquidation parameter updates?

  • Yes
  • No

0 voters

3 Likes
2

I will vote in favour of all the changes.

Curious why there was even a buffer built in the first place?

1 Like
3

I will also vote in favor of it. When a flash crash happens, the bots don’t have an incentive to liquidate loans when it results in losing money. It will help to have a more robust liquidation system :+1:t4:

4

Thanks DC for putting up the above proposal. In essence I agree with most of the proposed changes. Below are my comments to each of the four points:

Point 1 : I agree to increase liquidation bonus to 20%.

Point 2 : Since we plan to allow 100% liquidation at LiquidationThreshold0 (as per point 3), why don’t we just let LiquidationThreshold0 for ADA, DJED and iUSD remain at 80%. As such, the borrower will lose the entire collateral once price is triggered at LiquidationThreshold0, instead of still having 4% (80 minus 76) of remaining supply. Maybe I’m missing something here, do let me know.

Point 3 : I agree to allow 100% of the loan to be liquidated at LiquidationThreshold0.

Point 4 : I’m neutral on this. Would love to see further discussion and refinement of ideas before I can make a decision. I think the priority now is for Point 1 to be passed first to increase incentives to liquidation bot operators immediately. I hope one day Liqwid can have its own liquidation pool (owned by LQ stakers) akin that of Indigo protocol; but I understand that Indigo has a much simpler liquidation mechanism since they only have one asset as collateral i.e. ADA.

5

As an active Liquidation BOT Operator I support this proposal.

One thing I’m not clear is if after this update we will still potentially have 2 liquidations thresholds for one loan? Thanks

6

Hey Giovanni @easy1staking if the updated liquidation parameters are voted in there would be 1 liquidation threshold where 100% of an unhealthy position can be repaid. So the LiquidationThreshold0 parameter would have a CloseFactor0 of 100%.

1 Like