2/ Most people in DeFi know the fundamentals of lending protocols: lenders and borrowers place assets into a smart contract, and borrowers are able to take out loans as long as the value of their collateral is substantially greater than the value of their loan.
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3/ Borrowers will always repay their loans so that they're able to get back their collateral. But what happens when the value of the collateral drops? If it falls below the value of the loan, borrowers should take the borrowed asset and run, pocketing a nice profit.pic.twitter.com/0EihMpMxsF
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4/ This is where liquidators step in. Liquidators, running sophisticated bots, automatically detect risky loans, and repay the lenders while seizing a portion of the collateral. Many will then immediately flip this collateral on a DEX, guaranteeing a spread.
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5/ In 2018 and 2019, this was a big business. Almost $5MM in pure profit was made liquidating risky loans across lending protocols, with some of the top bots closing nearly $1MM. That's almost a lifetime of Vapormaxes and sashimi for the average American household!pic.twitter.com/qEWm7Ggo0d
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6/ Hearing these numbers might entice some on the sidelines to join the fray. Not so fast! We see increasing competition in the space, with more Monthly Active Liquidators and a greater % of failed liquidations every month.pic.twitter.com/d8jeGc9C19
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7/ We also see this by looking at the % of profits by liquidator over time. Old guard liquidators are getting crowded out by new upstarts.pic.twitter.com/P7jaCmeCYq
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8/ And that's not all! Borrowers are becoming savvier, employing tools like
@DeFiSaver to unwind their risky loans without having to pay a liquidation penalty. This shrinks the TAM for prospective liquidators, making competition even more fierce.pic.twitter.com/uDf5tonsiV
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9/ Ultimately, we must ask why we even have liquidation penalties. They seem to be doing a great job keeping the market solvent (per
@alexhevans findings on CDP collateral ratios), but it also seems likely that that a static liquidation fee is probably suboptimal.Prikaži ovu nit -
10/ We can probably eke out more efficiency by moving to auction- or market-based models in the future, or the entire space might see competition from unsecured loans from projects like Union or ZeroCollateral (per
@AlexMasmej https://defiprime.com/crypto-loans-without-collateral …)Prikaži ovu nit -
11/ Overall, the frenzy in liquidations is a testament to the early success of projects of like
@compoundfinance,@MakerDAO, and@dydxprotocol. Looking forward to seeing what 2020 brings
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