Jan 2022 market crash post-mortem

Over the weekend, Balanced experienced a situation caused by a combination of large liquidations, high-risk positions, and a drop in ICX price, all exacerbated by reverse rebalancing mechanics. It was a black swan event created by a perfect storm of circumstances.

Here’s what happened, the reactionary measures by the DAO, and future plans to mitigate the risk of this happening again.

What happened

The recent market volatility pushed a lot of people into higher LTV positions, but we believe the storm was triggered by the liquidation of one large account.

When the liquidation for this account was triggered, some of the collateral was available for a 10% discount. This created a lot of demand for bnUSD in order to liquidate that account’s position and pay off the bad debt. A 10% discount is still profitable for liquidators until bnUSD reaches $1.10.

After the position was liquidated, the price of bnUSD was too high, which triggered reverse rebalancing. As the ICX price dropped, other accounts began to get liquidated, which put more pressure on the peg and triggered more reverse rebalancing. The ICX price continued to drop so more accounts got liquidated… and so on.

How the DAO reacted

To stop the spiral, a series of 24-hour votes were proposed:

BIP19 failed to enact, but the other changes were enough to stop the spiral. Two more 24-hour proposals were submitted during the next voting period:

These changes allowed people whose collateral was previously locked to start deleveraging their positions, with more flexibility in the bnUSD peg to prevent these adjustments from triggering additional rebalancing.

Remember, any community member who stakes 0.1% or more of BALN’s total supply can propose changes to most critical network parameters at any time, either from the Vote page in the app or directly through the smart contract.

What’s being done to improve the experience

The DAO and community devs are taking a number of measures to prevent a situation like this from occurring again:

  • Enhance rebalancing to make it safer and the effects less noticeable (community member Benny Options has aggregated some thoughts in Rebalancing mechanism enhancements)
    • Implement an asymmetric peg, which would have a tighter threshold below $1
    • Limit the amount that can be rebalanced each day to a specific percentage of the total bnUSD supply (which would allow borrowers to adjust their positions after the daily cap has been hit)
    • Potentially limit rebalancing to positions with the highest LTV
    • Set a threshold on reverse rebalancing to prevent borrowers from being rebalanced into liquidation
  • Update the Balanced messaging and UI to make people more aware of smart contract mechanics, and create resources that make it easier for them to educate themselves.

What the Balanced community can do now

There’s been a lot of discussion about whether to repay the excess collateral from each liquidation. Balanced’s liquidation ratio was 67% LTV and liquidators received another 10% for covering the bad debt, so the remaining collateral from each liquidated position was sent to the Emergency Reserve fund.

The community is gathering the data for each position that got liquidated in the past week, so the Balanced DAO can decide what to do.

It’s ultimately up to the community to decide what they feel is most fair, but if the DAO votes to return any sICX, the community devs will have a claim option ready to support it.

View the liquidation data and the ongoing conversation here.