Solend struggles with whale liquidation, TetraNode interview, Celsius and 3AC freeze withdrawals , CT rumours de-peg $MIM, MakerDAO withdraws DAI from Aave and more...
Issue #2 of The State of DeFi Lending newsletter
Itβs been a rough 2-weeksβ¦
Β $340m SHIB being liquidated on Bitmex [not DeFi but stillβ¦]
Welcome to issue #2 of The State of DeFi Lending, a newsletter covering the highlights of lending markets in DeFi.
In this issue we cover -
CeFi platforms Celsius and Three Capital Arrow suspend withdrawals.
Solend struggles to liquidate a whale spun a DAO governance saga.Β
MIM bad debt rumors deppeg its price. RiskDAO dashboard tracks MIMβs bad debt.
MakerDAO withdraws its DAI from Aave.
The Tribe DAO rejects the Rari Capital incident compensation proposal.
An interview with Tetranode.
Read below for moreβ¦
Dashboard
News Recap
Celsius and 3AC suspend withdrawals
Celsius, one of the biggest gateways into crypto and a lending giant on its own, managing at peak over $20b funds for over 1m customers, announced last week that they are pausing all withdrawals, swaps and transfers for all of its accounts, signaling a liquidity crisis. A few days ago they made another announcement that basically nothing has changed.
Claims were made this was a planned and coordinated attack on Celsius, including an offer of up to $20m bounty to anyone giving some proof on these allegations.
Nearly at the same time, Three Arrow Capital (aka 3AC), one of the biggest funds in the crypto space, who have managed over $18b at its prime according to unverified resources, have also gone through what seems to be a similar process of margin calls and liquidations. With a much vaugier message, 3AC founder Zhu Su stated they are βcommunicating with relevant partiesβ.Β
And so we awaitβ¦
Solend struggles with liquidating a whale
Solend, Solanaβs biggest lending platform, is going through some turbulent times as a huge whale position faced liquidation that could have impacted the entire platform.
As markets kept on crashing last week, Solend founder shared his concerns regarding the platform ability to liquidate a single whale position who got near his liquidation threshold.Β Β
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His concern was about the impact such an event would have on SOL price, risking Solend users funds, as a cascading liquidation event might get triggered across the Solana network as SOL price gets hit by the huge selling pressure created by liquidation bots dumping on Dexs.Β
This event started a governance βsagaβ on Solend, as the team was trying to come up with strategies to mitigate the liquidation risk. A first-ever gov proposal was made and passed just to be countered by a second one 24 hours later, after getting negative feedback from the community and some leading crypto figures. By the time the 3rd proposal was made (and passed), the team got in touch with the whale who started distributing his positions across different Solana platforms, lifting some of the weight off Solend.Β
At the time of writing, the Whale account still holds over 95% of the total supply of SOL in Solend (worth of $144m), and over 65% of the USDC supply (72m out of 110m).Β
This case demonstrated the risk lending platforms take, on behalf of their users, as eventually, without a dedicated backstop to handle liquidations, like the one B.Protocol offers, Lendersβ funds become the ultimate creditors to share the loss.
Amy Castor wrote a tale on the Solend saga
MIM de-peg as CT rumours about bad debt spread
Another week, another FUD attack in DeFi. $MIM, the Magic Internet Money stable of the Spell community, was depegging after CT βnewsβ regarding some $12m of bad debt on the Abracadabra platform, and an accusation that the team shutdown their dashboards to hide the bad debt.Β
The MIM team published its response within a few hours, claiming the dashboard was taken down because of technical difficulties, and asserting they have over $13m in treasury to repay the bad debt.
In the following days MIM has regained its peg, and is trading at $0.99 currently.
The RiskDAO launched an independent monitoring dashboard for MIMβs bad debt, and now the information availability no longer relies on the MIM team.
MakerDAO withdraws $41m DAI from Aave
Due to stETH depegging from ETH value in recent weeks, and risk concerns from the amount of DAI being borrowed against stETH on Aave (with big chunks of that related to Celsius), MakerDAO went through an Urgent SIgnal Request process in order to mitigate its exposure to these external market conditions.Β
βIn these times of distress you just want to hedge this if it can be done smoothly without affecting markets.β
Primoz, MakerDAO Risk Core Unit lead.Β
The situation seemed to escalate due to a governance proposal made by Gauntlet to change the liquidation threshold parameter for stETH to 90%, while freezing new stETH positions from being opened, and preventing additional ETH from being borrowed.Β
Though the Gauntlet proposal failed to pass the Aave governance vote, MakerDAO has executed their vote to withdraw their DAI from Aave to mitigate the risk until market conditions will clarify. The result - $41m DAI were withdrawn from Aave by temporarily setting the Direct Deposit DAI Module (D3M) bar target to 0. MakerDAOβs Risk Core Unit wrote in the forum discussion that this decision will be revised in a few weeks according to market conditions.Β
Updates from previous issues
The Tribe DAO compensation plan for the Fuse hack victims
Rari - After vetoing the βfast-laneβ of the compensation plan from being executed by the Tribe Council, the Tribe DAO voted NO on the on-chain proposal to pay back users who were affected by the $80m Fuse hack. 0xMaki was among those who explained why he voted No on this one -
5Qs
For our #2 issue we are proud to have Tetranode answering 5 questions.Β
If you came that far in our newsletter thereβs no way you havenβt heard of Tetra before, one of the most prominent DeFi whales, a Chad council member in JPEGβd lending platform (an NFT lending platform), Owner of one of the biggest lending markets in Rari Capital, and many more. Last week Tetra has left CT, so these might be the last words you will get from himβ¦ so pay attention
Unlike in traditional markets, the overwhelming majority of DeFi lending platforms are offering variable interest rate loans without a maturity date. Why do you think it became the norm, and is it an inferior product?
A: Variable interest loans have rougher UX but the tradeoff is that they are more responsive to market supply/demand, which makes them less likely to suffer a tail-end, systemic failure. I think in DeFi, we optimize for antifragility to avoid utter failure that occurs too often in TradFi... in that sense I view DeFi as the superior tradeoff
JPEGβd is one of the first platforms to offer loans against NFT collateral. Should NFT projects, or low liquidity ERC20 projects, see lending market liquidity as a (positive) goal, the same way they see DEX liquidity?
A: They should! It increases price discovery iterations, and in the future, NFT lending platforms could become NFT kingmakers!
Will we end up in a winner-takes-it-all world with one lending platform (possibly with segregated markets) that controls most of the market?
A: Not confident of my answer here, but I'm thinking no: the bigger the platform, the less risk they can take in terms of onboarding collateral... and that gives plenty of market opportunities to challengers that facilitate onboarding of D-rated assets... think about Compound vs AAVE, where Compound is slow and conservative while AAVE moved faster in terms of onboarding less reputable assets... in the end there is room for both, and even Rari Fuse (b4 the hack) had an addressable market of its own from AAVE still being too conservative!
It seems that the recipe book for launching an alt-chain is to launch both Uniswap and Compound forks on day 1. Is launching a lending platform on a new chain serves a real purpose for the chain or just a way to bump the chain TVL?
A: I tell my projects that if they don't deploy their app on the new chain first, a cheap fork will do it for them. It's best to claim territory first and worry about the market fit later.
Debt backed stable coins like DAI, MIM, and LUSD, gained some popularity during the bull market, and are even more attractive in a world with high risk-free interest rates, as they offer liquidity and borrow rates that are detached from the actual market conditions. Who is losing when projects like MakerDAO, LUSD etc give loans at rates that are smaller than the βreal marketβ (e.g., Compound and Aave) interest rate?
A: The real market interest rate is an arb between minters like MakerDAO and LUSD versus the free-market offerings like Compound and AAVE.
There are other factors at play when it comes to minting and rates... Let's say MakerDAO offers a loan at 75% LTV @ 2% APY while AAVE offers 80% LTV @ 3% APY, the free market reaches steady-state equilibrium where the market rates are arbed by users who choose either: additional headroom or lower rates.