Mounting Crypto Liquidations Make DeFi Go to Extremes
The record-setting rout in cryptocurrencies has put a slew of decentralized-finance applications and their communities in a race to protect themselves against a cascade of liquidations -- sometimes by employing unprecedented measures.
On Sunday, token holders of Solend, a lending app on the Solana blockchain, voted to temporarily take over a large user’s account that faced the threat of a large liquidation, an extreme move for DeFi that appears to be a first. That decision was reversed in a second vote on Monday.
That all took place after MakerDAO, an app that supports stablecoin DAI and is run by a crypto community that formed one of the first decentralized autonomous organizations, suspended the token from being deposited and minted in DeFi crypto lending platform Aave.
DeFi apps -- in which users can trade, borrow from and lend to each other without intermediaries like banks -- are suffering because they tend to be interconnected, and troubles in one can have cascading effects on others. Users often put up tokens as collateral to borrow a coin in one app, to be deposited to get higher yields into another. When crypto prices tank as has happened recently, that can trigger margin calls on collateral, and users that don’t address this by adding more collateral get liquidated in a process triggered by software and executed by bots designed for this purpose.
When a user is ready to be liquidated, these bots -- run by third-party programmers and traders -- jockey to liquidate the positions so they can earn a bonus for doing so, a common practice in DeFi. As many bots compete to liquidate a position, that can clog a blockchain with transactions. Meanwhile, a dump of a slew of coins by liquidators can also further pressure
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