TheLinkHound’s Take on Compound’s Liquidations
From the Community - 2020-11-30
Once again, Decentralised Finance (DeFi) was in the news for all the wrong reasons.
This time it was Compound.Finance's turn to have its protocol scrutinised for what many observers have perceived as bordering on negligence.
Compound.Finance is an algorithmic, autonomous interest rate protocol built for developers to unlock a universe of open financial applications. At the time of writing Compound.Finance reported it had close to $3 billion dollars’ worth of assets earning interest across 9 markets.
The Compound.Finance protocol utilises what it calls the ‘Open Price Feed’, which is a decentralised oracle that allows the project’s lending system to obtain data and to ultimately function. The Open Price Feed currently only uses Coinbase Pro data in conjunction with Uniswap V2 ‘on-chain’ price data. The Uniswap V2 data is described in official Compound.Finance documents as a ‘sanity check’.
Before discussing what happened to Compound.Finance’s protocol it is necessary to introduce some key concepts for the terminologically uninitiated. Liquidation occurs when the value of your borrowing rises above the level of your borrowing capacity. Liquidation can occur when the collateral asset drops in value or when the borrowed asset rises too high. A Dai is a decentralised crypto-collateralised stablecoin that aims to maintain a stable value relative to the U.S. dollar.
Alright, so what thrust DeFi back into the headlines? On the morning of 26 November 2020, cryptocurrency markets suffered a powerful crash. As is often the case during such events, investors rushed to trade their crypto assets for stablecoins. And it is at this precise point that things started to get very interesting for Compound.Finance. It should be noted that at the time of writing it remains unclear whether the events of 26 November were sparked by malicious intent or simply caused by a natural, spontaneous reaction to market movements.
What is clear however, is that on the morning of 26 November, the Dai-USD Coinbase price data (yes, the very same data on which the oracles almost exclusively rely) surged to a maximum dollar value of $1:34. This significant deviation away from the desired ratio of 1 Dai:$1 USD resulted in serious consequences for a number of Compound.Finance users. Yes, you guessed it: Liquidations. Lots of them.
Dai:USD Coinbase Price Data
What this article does want to draw attention to is the Dai:USD aggregated price feed data as reported by the Chainlink decentralised oracle network, during the same period. It is evident that the Chainlink Dai:USD price feed weathered the proverbial storm with much greater resilience than the one used by Compound.Finance.
Because the Chainlink Dai:USD price feed employs seven trusted node operators, each obtaining premium data from a wide variety of high-quality data providers.
Once again, the Chainlink oracle network was subjected to real-world stresses and it once again illustrated its superiority in its ability to cope with those events. One thing is for sure, the Chainlink network passed this 26 November test with flying colors.
The question that then arises is, why would any DeFi protocol that values the security of its clients’ assets not use this proven decentralised oracle network that continues to demonstrate its robustness?
Head over to reputation.link and check out statistics and graphical representations for all of the Chainlink price feeds.
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