Liquidation Looms: DeFi Ecosystem Faces Another Bailout with Venus Protocol’s $30M Event

TL;DR Breakdown

  • BNB’s price dipped below the liquidation threshold, leading the BNB core team to liquidate $30 million in USDT debt, seizing $33 million of BNB collateral.
  • Despite the recent liquidation, the position’s health remains at risk, with potential further liquidations if BNB’s price drops to around $210.8.

Description

The decentralized finance (DeFi) world is again on edge, grappling with the repercussions of a significant liquidation event. The Binance Smart Chain’s (BSC) Venus Protocol is the latest platform to take unprecedented steps to mitigate systemic risks. This comes in the wake of a series of events that have shaken the DeFi community’s confidence. Contents … Read more

The decentralized finance (DeFi) world is again on edge, grappling with the repercussions of a significant liquidation event. The Binance Smart Chain’s (BSC) Venus Protocol is the latest platform to take unprecedented steps to mitigate systemic risks. This comes in the wake of a series of events that have shaken the DeFi community’s confidence.

A Quarter-Billion Dollar Position and a Notorious Hack

In October 2022, the crypto community witnessed one of the most significant hacks in its history. An entity, now widely believed to be the North Korean-affiliated Lazarus Group, successfully pilfered a 2 million Binance Coin (BNB) from a cross-chain bridge. This haul was valued at over half a billion dollars at the time.

However, the attacker’s subsequent actions were even more audacious. Fearing potential retaliatory measures from Binance, such as a chain rollback, the attacker refrained from offloading the stolen BNB. Such a move would have drastically plummeted the BNB price. Instead, they ingeniously deposited hundreds of millions into the Venus Protocol as collateral. 

This strategic move enabled them to secure a $150 million stablecoin loan. Most of this loan was transferred to other chains and swapped for Ethereum (ETH). Tether managed to freeze only a minor portion of these funds, and it became evident that the attacker had no intention of repaying the debt.

According to data from DeFiLlama, this massive deposit from the attacker made up nearly 20% of Venus’ total value locked. Given the limited liquidity for BNB, liquidating this position would have spelled disaster for Venus, potentially resulting in a significant bad debt situation.

BNB Core Team Steps In Averting a Potential Crisis

Recognizing the looming threat, the BNB core team took proactive measures in November. They proposed to become the sole liquidator for the position, a proposal that was greenlit via Venus governance. The core team’s representative highlighted the potential cascading liquidation effects and the broader market damage that could ensue if the position were liquidated in the volatile market.

However, the situation remained dormant until June 2023. The price of BNB was teetering close to the liquidation threshold. To stabilize the situation, $30 million in Tether (USDT) was added to the liquidator address, complementing an initial $30 million BUSD position. The situation reached a climax last night. Amidst a market-wide downturn, BNB’s price dipped below the liquidation threshold of approximately $220 million. 

This prompted the BNB core team’s designated liquidation address to intervene. Contrary to widespread reports suggesting a liquidation of over $60 million, the core team liquidated $30 million in USDT debt across three transactions, seizing $33 million of BNB collateral. However, the storm might not be over. Data from Debank indicates that the health rate of the position remains alarmingly low. Another market downturn could trigger further liquidations at a BNB price of around $210.8. 

Post the recent liquidations, the liquidator address holds an additional $29.9 million in stablecoins, juxtaposed against a staggering $126 million in remaining debt. Venus BD & Community Lead, pseudonymously known as “Danny,” assured that the “BNB Chain will continue to monitor and manage the health of the account as necessary.”

DeFi Lending Markets: A Pattern of Distress

Venus isn’t the sole platform facing challenges. On July 31, the decentralized exchange Curve Finance was hit by a $70 million hack. Although a significant portion of the losses was recouped or seized by ethical hackers, the CRV/ETH pool suffered immensely. This pool was pivotal for CRV’s on-chain liquidity.

The DeFi community was on tenterhooks as Curve founder Michael Egorov had substantial loans, amounting to over $110 million, backed by CRV as collateral. Liquidating these positions without adequate on-chain CRV liquidity could have triggered a domino effect of bad debts and liquidation cascades throughout the DeFi space.

Conclusion

In a turn of events, Egorov settled a significant portion of his debts by offloading large quantities of CRV over-the-counter (OTC) to various parties. However, he still shoulders over $45 million in outstanding liabilities to multiple protocols. The recent events underscore the intricate challenges and vulnerabilities inherent in the rapidly evolving DeFi landscape. Stakeholders must remain vigilant and proactive to ensure the ecosystem’s stability and growth.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

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