We are sorry that we underestimated how illiquid NFTs could be in a bear market when setting the initial parameters. In the past several days, we got tons of feedback and suggestions from the community (BIP#8 Changing Lending Parameters). After a comprehensive review and discussion, it’s time to make a proposal to help ETH depositors to build confidence. To achieve that, we would like to do the following for the community to review:
Protocol short-term parameter improvement (It will be effective after 24 hours of voting in the Snapshot):
Adjust the Liquidation Threshold to 70% as follows:
update to 85% August 30th, 12 pm UTC
update to 80% September 6th, 12 pm UTC
update to 75% September 13th, 12 pm UTC
update to 70% September 20th, 12 pm UTC
Adjust the Auction Period to 4 hours
The 48-hour window is designed to protect NFT holders to avoid liquidation without waking up and losing their PFP. But right now we have TWAP protection of Oracle on-chain which means floor price attack would be very difficult. So we would like to reduce the period from 48 hours to 4 hours to improve liquidity for auctions.
Remove the first bid limitation of 95% of floor price
It will limit the aution competitors.
Adjust Interest Interest Base Rate to 20%
It would help more ETH depositors earn more interest and prompt more NFT holders to repay ETH.
Make a proposal about if the bad debts happened, how to deal with it
BendDAO community can vote to decide how to use the revenue and BendDAO treasury to cover the bad debts if it happens. We will make a discussion in the forum and a proposal for it soon.
UI improvement in new 24 hours:
Display how many floating bad debts in ETH of BendDAO auction page
It is very important to provide more transparent information about what the situation is now. Even 100 ETH floating bad debts can make the 15,000 ETH depositors get panic if someone FUD. Transparency is the key to trust.
Display how much interests total on the homepage
Right now users feel confusing about ETH borrowed > ETH reversed, the difference is due to the interest total generated for veBend holders and ETH depositors.
Protocol improvements in the future:
Support offers for collateral in BendDAO
Reach as many exchanges as possible to list collateral
Trying to support downpayment for auctions
BendDAO is what we build to try to provide more liquidity for NFTs, and we will move on.
I think the auction time period should drop to 24 hours, this gives everyone in every timezone an equal shot, and the 20 percent reduction in liquidation threshold should easily allow for this
24h is too long for the current situation imo. We have an on-going crisis here – I’d rather overfit for protecting the protocol than for making the UX good.
Thanks for writing this up @PirateCode and I’m glad our previous proposal could serve as a good starting point.
I think these are good measures and address the right problems. On top of them, I’d expand the proposal with the following:
The DAO should consult with parties specialized in risk to do a thorough analysis and subsequently build a more sophisticated system that fully accommodates for existent and future risks. This can be arranged and discussed at a later date, but it might be a good idea for the DAO to engage in something like this and mentioning the possibility of doing so in this proposal could be worth it.
At the end of the proposal, some changes that would likely require modifications to the smart contracts are mentioned (such as supporting collateral offers). It’s probably a good idea for the DAO to review potential improvements to liquidation system too. Some ideas include the following:
Allowing offers that are greater than the debt but not necessarily greater than 95% of the floor.
Modifications to the way the surplus coming from a liquidation of an NFT at an excess is distributed (i.e., following from a previous post in this forum)
Pivoting away from an English auction system (thank you Yaron) and borrowing some ideas from MakerDAO’s system design.
I’m not completely sure how deposits are tokenized. If they are with transferrable tokens, the DAO could step up to offer current depositors the option of selling their positions to the DAO at a discount, potentially funded with money from the treasury or from OTC buyers or other parties. This would allow a way for depositors to exit their positions and alleviate stress coming from community members with their ETH stuck in the protocol.
Overall, I think the proposal is already a step in the right direction. I think it could be further expanded with some ideas too.
Agree with the proposal, a higher threshold make bids more risk / reward attractive, while the 4hr make stuff faster to manage…looking fwd the debt management proposal for the DAO
As I expressed to the BendDAO team via Telegram, I believe the current proposal on Snapshot should not pass.
Following the overwhelmingly negative response from the community (especially to the point about lowering the liquidation threshold) and the real risk of liquidating people that signed up under different terms, I think that the current proposal should not go through and that instead a draft proposal should be brought up that addresses the new points raised by the community. This can be done in the span of a few hours.
I believe that some changes could be implemented soon which would alleviate the situation without sacrificing the borrowers (i.e., check out here and here). On top of these ideas, an arrangement should be pursued with OTC buyers where they could commit to buying distressed assets from the protocol for the next several weeks. This is realistically one of the best shots at reducing the risk of bad debt (by off-loading assets that are pending liquidation) and decreasing the utilization rate (consequently freeing up capital for depositors to withdraw, if they want, and bringing the APRs down, helping with the debt spiral currently on-going).
All in all, I believe that the community should be put first and that many fair points were raised that the current proposal does not address. I don’t think this has to be some sort of Pyrrhic victory where the protocol reduces its own risk at the cost of losing its community of borrowers.
My suggestion is that the next step could be to discuss the establishment of a liquidation fund or the introduction of a third party professional liquidator to handle the liquidation.
Put the risk to a professional person or institution, benddao should not come to handle these risks, but can provide a platform to handle the risk, but the risk should not be borne by benddao.
As of now I believe there are no real “bad debt” to the protocol, as shown on BendDAO’s website. I also think we should leave to the market to decide when and how to liquidate an asset. So if someone wants to liquidate, he/she should go thru auction on BendDAO itself, instead of doing so with OTC trades. I believe that is fundamentally against the DeFi spirit.
The point is that you can negotiate OTC with people that can buy the collateral directly from the website. What do you meant this is “against the DeFi spirit”?
Secondly, the protocol doesn’t have bad debt right now because the floor went up. However, the protocol currently has 219 ETH in debt from loans that are pending liquidation and have not had any bids (source). If the floor drops, this could well create bad debt because the price at which you auction the collateral may not be enough to cover all the debt.