Recent Liquidations & building goodwill

Proposal Discussion WIP: DFP
#119

Title: Return 1/3 of seized collateral to all borrowers liquidated between Jan 20th and Jan 24th 2022

Eligibility to claim sICX: Balanced borrowers liquidated between Jan 20th and Jan 24th 2022

Amount of sICX to use: 1/3 of the liquidated amount - 1.954M sICX out of the 2.27M sICX held in the emergency reserve.

Hey guys, Just copying this from the other thread…

There is general agreement that some refund should be made, and it is clear that the system spun out of control with unexpected rebalancing dynamics that hurt most of us, but some more than others. Since this is different than the May crash I’d propose the following only apply for those liquidated in the most recent crash.

At the time of liquidation accounts had an LTV of 100:150, so 2/3 of the collateral value went to covering the debt and 1/3 went to incentives or into the emergency reserve fund.

Proposal: Balanced DAO refunds 1/3 of liquidated collateral value to those who were liquidated. This will restore those who were liquidated back to the value they held at the time of liquidation.

  1. The emergency reserve holds sufficient sICX to cover this. Roughly 1.954M sICX would be paid out from a reserve of about 2.27M sICX.
  2. This means Balanced would be covering the value of the incentive fees out of previously accumulated sICX. This seems like the sort of emergency this was retained for.
  3. Those who were liquidated would thus be made whole to the value they held at the time of liquidation, plus they would be free of any debt, so they would be free to redeposit with Balanced or not.
  4. To accomplish this we’ll need some smart contract work - @benny_options - can you check with the devs to see what is possible or already in progress?
  5. A vote will be proposed to take this course of action.
  6. Another vote would be proposed with the specific list of refunded addresses and amounts so everyone can see and confirm.
  7. Considering that we seem to have had as high of vote participation in the 1-day votes as we did with recent 5-day votes we could also go with shorter vote durations for these in order to get the funds available sooner.

It seems like this level of refund is required. Is it enough? If someone else has an idea for another specific proposal please detail it out for us.

Balanced will have to go further to incentivize borrowers to take on the risk of a loan going forward, and serious thought needs to be given to other approaches to maintaining the bnUSD peg.

16 Likes
Liquidation event (refund)
Liquidation event (refund)
#120

This sounds good to me. I 100% back this

6 Likes
#121

Makes sense. I support and think this is a step in the right direction. Thank you for taking the time to put this together. If there ever was an emergency time I would indeed agree that this was it.

4 Likes
#122

I support some kind of refund like the one posted by particleX. I’ve been pretty vocal on other social media with my thoughts. As a baln holder and Staker I think this event will create a negative connotation that will follow baln from this point forward.

There are both sides to every argument. And one thing to consider. The etc chain was basically created because users didn’t agree with the dao refund. You tell me which chain has more value in todays market?

Personally I think the ones who are arguing against any refund either A) didn’t hold a loan through this mess B) stand to profit most from being a liquidator.
You couldn’t control it, the lowest risk possible became high risk with no control of your own. Other than to close out entirely. Which cascaded onto others the issue. I spent the last 24 hrs of my vacation trying to stop a complete train wreck. A 100x position is easier to manage. That’s not a bank I want to be involved with.

Personally, I won’t be minting bnusd ever again. The level of unmitigated risk is some thing I’ll never expose the fund to again. And that’s where the main issue lies. How to grow from here. If the only way to mint bnusd is through loans the issue of rebalancing into a cascade of liquidations remains.

Pegging bnusd to multi assets is one of the ways out, which I could then re enter the bnusd market.

6 Likes
#123

I feel it’s quite generous. The DAO emergency fund would be covering just under a third of the refund (roughly 586,000 sICX), using previously held sICX.

I’m not saying I’m against this proposal. Just that it covers the fee paid to liquidators as well, in an effort to make the liquidated whole again ~ that’s the part that I feel is generous.

4 Likes
#124

There are discussions happening:

1 Like
#125

If it would come to a vote I would vote yes on this but as previously stated by Awaxjago this would be very generous. Its bassicaly a full refund and will take aditional sicx from the fund to cover. Perhaps a proposal to devide and give back all the sicx added to the security fund between the 20th and 24th of january would have a better chance of succeeding. In that case it would be like it never happened for all other users. It would result in a refund around 25%

2 Likes
#126

I think it is more beneficial to have those ICX back in the ecosystem than collecting dust in the emergency fund. They will inevitably find their way back to BALN and Dapps and add more utility. They are not a productive asset sitting in the emergency fund. I think this is the time to be as generous as we can to help our own. The more we help now the stronger the community will be going forward. There will still be plenty left in the emergency fund.

7 Likes
#127

The argument from those who were liquidated might be that if this had never happened, and they hadn’t been liquidated, like if the liquidation LTV were 85% all along, then they would have retained the upside from continuing to hold all of their collateral. In that sense, they were still forced to sell enough collateral at the bottom to cover all of their debt.

So I don’t think we are letting them off too easily, they are still suffering some from having maybe held too risky a position, but then we are all suffering some and many of us sold a considerable amount of collateral to avoid liquidation.

That’s why I feel this is pretty equitable compromise.

7 Likes
#128

Thank you @particleX, for putting forth a proposal. We all appreciate the effort.

AS A REMINDER TO ALL ON THIS THREAD:

If you want a specific proposal to be voted on, PLEASE DO WHAT @particleX did here

6 Likes
#129

After taking time to read all arguments of every angle and thought through this thoroughly, I believe this is the best proposal for a compromise where all parts can meet. I believe we should go for this and make a vote out of it.

9 Likes
#130

Well thought through solution. I support this idea.

6 Likes
#131

Should add a lock. Maybe most people who get it back will sell it asap.

#132

This sort of proposal is way out of line.

Are we saying that the parties that DID manage to bring their accounts within the parameters they all signed up for, the current borrowers, that right at this moment still would not get back collateral - debt if liquidated, are they are a lesser citizen than parties that did get liquidated?

People talk about the health of platform, should we not prioritise parties still in the ecosystem, that undoubtedly still suffered finanicial loss but had the risk management to deal with their risk?

I am not against a goodwill guesture, but lets examine the language and sentiment shall we? Bold emphasis mine.

  • Non specific to the proposal but generally - ‘refund’

it is clear that the system spun out of control with unexpected rebalancing dynamics that hurt most of us, but some more than others.

This will restore those who were liquidated back to the value they held at the time of liquidation.

Those who were liquidated would thus be made whole to the value they held at the time of liquidation

It seems like this level of refund is required. Is it enough?

EDIT: I left out the worst one

Return 1/3 of seized collateral to all borrowers liquidated between Jan 20th and Jan 24th 2022

It also doesn’t miss the chance to take a swipe at Balanced

Balanced will have to go further to incentivize borrowers to take on the risk of a loan going forward, and serious thought needs to be given to other approaches to maintaining the bnUSD peg.

Is this a proposal for generating goodwill?

This is what it sounds like it does:

  • Financially incentivises parties who, as per the list above do not give any sort of indication to be parties that are receiving goodwill but in fact parties that appear to clearly generate bad sentiment on the platform regardless of a donation to them or not.
  • Clearly indicates that parties that managed their positions and suffered financial losses in excess of 66% that they should have just taken it from the DAO instead.
  • Giving parties liquidated a better deal than current users right now, in fact if you have a 66% LTV ratio NOW closing out your position NOW gives a worser deal than that, because bnUSd is over 1 USD by a bit, while this proposal is basically valuing bnUSD at 1 USD.
  • I need to say it a second time If you are at 66% LTV now, selling and closing your position now is worse than getting liquidated previously if this proposal passes

The proposal is lacking:

  • Any sort of indication this expenditure will generate any sort of goodwill or retention of users.
  • In fact, to me personally, looks to clearly reduce userbase by clearly indicating to current borrowers they are far less important.
4 Likes
#133

Hey @arch , I appreciate your feedback as always, but I’d like to point something out that’s extremely important for the future of Balanced.

As it stands, this is the only proposal. I recognize you strongly disagree with this proposal, but if anything else is to go for a vote, a community member must put forth another proposal. I hope to see multiple proposals. Given your strong opinion, it would be great to see one from you as well. I would hate to see only one proposal go up for voting.

We can set a soft deadline on this thread as to when the on-chain vote should take place.

@particleX of course feel free to adjust your proposal as well given feedback from replies on this thread

#134

I agree, my comments were only directed towards the proposal, not ANY or EVERY proposal on this topic.

I would have no issues with writing a proposal myself, however to do that in good faith I would need to have a basis or argument to put forth. As it stands, I’m waiting for a proposal I agree with, not because I agree with it as it matches my thoughts, but because I agree with it because it helps me see the angle.

I can say a reasonable ‘amount’ might be the difference between current liquidation penalties and previous liquidation penalties, in practice applying new rules to old. However I would not be able to articulate the gain from the use of that ‘amount’ - goodwill or magnitude thereof nor potential impact to existing borrowers.

Borrowers who, unlike parties liquidated, continued being rebalanced, and needed even more funds to manage risk.

For me personally there is a very large difference between ‘goodwill has value’ which it invariably does, and ‘this action will generate reasonable goodwill’.

2 Likes
#135

Hey @arch,

I am surprised by your impression of the proposal. I am not among the liquidated and best fit the description you give of the other side since I avoided liquidation by selling 100k+ sICX collateral in the low 0.6 bnUSD range. For some reason I often argue the position of other people and forget to advocate for myself. I’d agree that we don’t want a solution that leans in the direction of rewarding people for having been in some sense careless by overextending themselves.

To the extent that the rebalancing system had an unexpected feedback loop it was an error that negatively affected pretty much everyone who had a loan, but those who were liquidated are currently down the most. The only ones who benefitted were those executing the liquidations and I am experienced enough with human nature to know they aren’t looking for a way to pay it back.

Considering the points you made I’d have to agree the proposed solution may overcompensate a little. What state do you think we could offer to those who were liquidated that would be roughly equivalent to where they would be if they had avoided liquidation? That is what we are looking for, right? If we can settle that then Balanced might offer some other across the board goodwill gesture for all of us participating in borrowing.

2 Likes
#136

I would support this, and I believe this would restore my faith and others’ in the platform.

4 Likes
#137

I back this and would love to see this go to voting by the end of the weekend. We should put this off for a long time. I think all proposals should be in by Friday and put them to a vote by the weekend

The 33% I feel is very fair and reasonable given the circumstances around the liquidations.

4 Likes
#138

We will not have meaningful discourse if that is the point at which we start.
There was no runaway feedback loop, and if there was it certainly was not engineered by some party looking to seek profits from liquidations, if for nothing else, as this thread and your proposal suggest, most of any difference sits in the DAO.

From day 1, and as outlined by the very product of bnUSD, it has always been possible to liquidate the entire collateral. All you need to to sell enough ICX. You can do that today, you can do that during the crash you can do that in the future. The reason thats not profitable is it involves selling a lot ICX at a loss, and holding a ton of the currency you just destabilised.

But what else is like someone selling a crap ton of ICX, thats right, panic in a downturn.
Here I want to expand on some thoughts about how ‘rebalancing is the cause of these liquidations’

No rebalancing would not have been different from borrowing a stable with a small mcap

Imagine traditional leverage, on a CEX, you deposit ICX, borrow another stable. They actually assess your LTV on the USD value on both sides, however because most stables are very stable, this doesn’t vary much. However in the event USDT went to 1.10, as someone borrowing USDT, hence short USDT, that represents your position worsening, and could be liquidated just from USDT rising.

Any platform that doesn’t do that opens itself to liability and bad debt.

Now lets be 100% frank, bnUSD is not even in the same universe as the big stablecoins, with that kind of sell off and sort of small mcap and isolated enviroment, bnUSD price would have gone haywire. This increase in bnUSD price would be equivilent to the amount purchased via rebalancing.
The reason Balanced doesn’t evaluate your loan on the price of bnUSD is because it knows and itself enforces the value of bnUSD… via rebalancing. However if like now, its not really doing that, the actual risk to the position of the DAO is actually quite high. It LOOKS like the DAO is still currently taking 15% on liquidations, but thats only if bnUSD comes back to 1USD. If for some reason it sits at 1.10 or 1.12 for long periods of time, the ‘fee’ is almost zero, because yes, its not a fee, its a buffer to protect the peg.

There are in fact minor differences, but if the platform was instead evaluating debt via the DEX price of bnUSD instead of doing rebalancing and adding to positions, you would largely end up with the same % of LTV and get liquidated at about the same values.

The other half of what looks like ‘a feedback loop’ is, is plain and simple a long squeeze. When something used as collateral falls (and for a pair, when the price of the thing you borrowed increases) it causes mass buying… of the thing that is increasing in price(bnUSD), Which again, for bnUSD instead of increasing its price, manifests as increasing your position, INSTEAD. This point looks a lot like rebalancing is at fault but again lets remember. Balanced assesses your debt based on the oracle USD price of ICX instead of just the DEX sICX/bnUSD price, it KNOWS it can do this, BECAUSE of rebalancing. If there was no rebalancing, there would be no way to gurantee this relationship, and it would need to assess bnUSD on the price it has, which would impact the borrowers position in the same way, via the high price of bnUSD.

We must, look to even the largest and most successful stable coins, they are NOT 1USD during periods of extreme volatility, so pretending your debt hasnt increased when the stable you borrowed is in scare supply and rising in price is not a solution, and in fact opens the platform to very high risk.

TLDR: If bnUSD was just a small cap stablecoin pegged by USD, the liquidations would have been very likely to happen anyway. The key factors are not rebalancing but

  1. Large market sell off
  2. Long squeeze
  3. Tiny stablecoin market cap (far far smaller than the thing its trading against ICX)
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Rebalancing Mechanism Enhancements