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A neglected “business” in the gold digs of DeFi market

A neglected “business” in the gold digs of DeFi market

May 25
00:00 2020

DeFi was newly born with a value of only one billion USD, and it is expected to grow into a trillion-dollar emerging market in the future. Currently, the DeFi market is still in its infancy with high interest rate fluctuations, and the infrastructure of blockchain is not fully equipped. Therefore, there are lots of arbitrage opportunities. Those foresighted arbitrageurs earn huge profits as the volume of global decentralized finance increases.

In the field of DeFi, people focus a lot more on borrowed assets, interest rates, mortgage rates, etc. An important actor who ensures the loan contract is executed effectively is the liquidator. Liquidators work behind the scenes anonymously and help maintain market solvency. They also earn quite an impressive profit. So far, liquidators in the DeFi field have earned nearly US$500 million, and the overall profit margin has good growth prospects as the DeFi market develops further.

Not everyone is familiar with liquidators and the role they play in the DeFi field. They work behind the scenes like miners and validators, ensure the entire system operates effectively and in turn, earn huge profits. There are now a large number of professional liquidators all around the world who ensure market solvency and earn handsome profits, while being completely anonymous.

In the DeFi mortgage loan contract, as long as the value of the collateral exceeds the value of the loan, the mortgage loan works well as the borrower can access working capital without selling less liquid assets; however, when the value of the collateral falls, unscrupulous borrowers will have an incentive to avoid repayment, which increases the lender’s risk.

This is where liquidation comes in the picture. The purpose of liquidation is to protect lenders and prevent borrowers from defaulting on their loans. This is achieved by acquiring the borrower’s collateral at a low discount and then turning it into a loan.

To reduce risk, the major lending protocols in place currently require over-collateralization, that is, a collateralization ratio of up to 150% of the loan amount. For example, a borrower takes out a loan of DAI on Compound using over-collateralized ETH, however, if the price of ETH falls sharply during the loan’s tenure, the value of the borrower’s collateral falls. If the value falls below the 133% collateralization ratio required for ETH, then certain actions are triggered.

If the borrower does not top-up the collateral to meet the collateralization requirements or sells the collateral, then the liquidation process is triggered, and the borrower also has to pay a liquidation penalty. At such a time, a liquidator can trigger Compound’s liquidation process, and acquire the ETH collateral at a discount of 3%–5% below the market price. As a result, the borrower manages to repay the loan on the DeFi lending system, bad debts on the DeFi lending platform are avoided, and the system’s solvency is ensured. At the same time, the liquidator also receives a one-time 3%–5% profit, creating a mutually beneficial situation.

To become a liquidator, users need to have coding knowledge and be able to comprehend market sensitivity, otherwise they will not be able to capture liquidation opportunities. Liquidation is a type of risk-free arbitrage, and liquidators don’t need to predict the rise and fall of currency prices to earn a profit. However, to be a liquidator, people need the right liquidation tools. Although different protocols have different mechanism and terminology, they basically need the same components:

1. A bot that monitors eligible loans on Ethereum.

2. A set of smart contracts that can automatically liquidate and sell the liquidated collateral.

3. A decentralized exchange to sell cleared collateral in real time and guarantee the profit of the liquidators.

DEPCO leverages its own algorithms and financial strategies, and has the natural genes to become an outstanding liquidator. The DEPCO liquidation bot uses independently developed software ecosystem—the  Systemkeeper which is made up of globally innovative ecosystem products and strategies. The system’s core competitiveness lies in the bots and smart contracts developed by experts. Using robust algorithms, DEPCO’ bots are more sensitive to liquidation opportunities, can automatically process the liquidation, and sell liquidated collateral to lock in profits. So far, the Guardian System has become the core liquidator in major DeFi platforms such as Compound, Aave, dYdX, etc. As a guardian of market liquidity, DEPCO is helping DeFi’s lending market expand to a market size close to US$1 billion in loan guarantees, while building the confidence of lenders, which is crucial for DeFi to reach a scale of millions of users.

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