The FTX and Alameda Research Implosion has the potential to impact Crypto Industry for years to come. Today, new information brings confusion, speculation and the potential for another bankruptcy. CRV, war was played out on Aave yesterday and ended with the longer defeating the shorter.
Ponzishorter.eth shorted $CRV by borrowing and dumping $CRV; $CRV guardians bought $CRV, soaring the price to $0.72, and liquidating all collateral of ponzishorter.eth, he began to borrow a small amount of $CRV and sell from November 14, causing the price to slowly drop from $0.625 to $0.464, a drop of 26%. If he shorts $CRV through the perpetual contract on CEX, he will make a great profit.
Ponzishorter.eth’s shorting of $CRV also makes many people who use $CRV as collateral face liquidation. Among them is the Curve.fi founder, whose health rate on Aave has dropped to 1.5 (currently 1.62). Ponzishorter.eth increased the scale of borrowing and selling on $CRV. The Curve.fi founder saw this and increased the collateral on the position, ponzishorter.eth attempt liquidating Curve.fi founder’s $CRV on Aave by shorting $CRV.
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Aave Finance, tweeted about the liquidation of Assets on its protocol.
1/6 We want to address the cycle of liquidations that occurred in the CRV pool on the Aave Protocol today. The liquidations were successful (and worked as designed), but unfortunately, the size of the position left some excess debt within the protocol.
— Aave (@AaveAave) November 22, 2022
The Aave ecosystem, was built with a number of mechanisms that the Aave community can deploy to cover events like this, including the Safety Module, the Ecosystem Reserve and the DAO Treasury.
Let’s say you deposit $100 USDC into Aave lending marketplace, and then you borrow 85$ of CRV (let’s say 1$ per CRV). If CRV starts going up in price and you don’t return the CRV, then aave will use your $100 USDC to buy back the CRV you borrowed. But if on-chain liquidity is too thin, if price goes up quickly, then that $100 USDC might not be enough to buy back 85 CRV tokens, which leads to a bad debt.
On-chain lending devised by open source smart contracts isn’t as full proof as they want us to believe and there is still incentive for 3rd party interference we saw that with Solana earlier this year. DeFi was supposed to be about over-collateralization, trustless, permissionless, and neutral position brokering by code and contracts but it’s actually Dev teams and hyper-inflationary farm tokens instead.
From what I understand, the debt that Aave needs to cover came from slippage when ponzishorter’s collateral was sold for CRV. So perhaps some kind of weighted collateral requirement based on available liquidity?
Algorithmically factor the aggregated liquidation price at all times and then the % difference of the current price prior to selling. This % difference is the slippage and is already imposed in the liquidation penalty, but maybe it wasn’t enough?
Basically, get the notional size of bids in the orderbook, and get a weighted liquidation price from that. If the amount borrowed on AAVE is greater than 5% of the depth of bids, then prevent borrowing or some other deterrent (high APR, liq threshold lowering for new borrows, etc.)
Curve Stable ELI5
OxAlunara, stated that; the Old fashioned CDPs have a liquidation price. If your collateral goes below price then boom. LLAMMA is a loan that constantly rebalances your collateral, such that if your collateral price dips, your collateral gets swapped for what you borrowed.
So, instead of a big bang boom you’re dead, your collateral slowly gets ‘liquidated’ continuously so that as your loan nears ‘liquidation price’, your collateral is also enough to cover your debt. Math glasses guy says people will lose less this way.
Now this is a personal guess, but if you take a loan at $1000 ETH price and ETH wicks from $1000 to $30 back to $1000 you probably won’t be liquidated. Cannot confirm this, just my own speculation. I guess it’s kinda like Uniswap v3 ranges, except you don’t buy more of the loser.