By Michael Scott
Compound Finance users voted to approve reducing the borrowing limit for illiquid altcoins by 99%.
The users of the DeFI lending platform unanimously approved the proposal restricting the borrowing of ten tokens for their illiquidity. The proposal approved on November 28 was initiated by Gauntlet – a firm providing financial modeling services. Despite the total turnout being 7% of the circulating COMP tokens, the majority acknowledged the proposal was timely to fend off further exploits.
New Lending Ceiling for Altcoins
Among the notable victims of the Compound governance vote was UniswaP (UNI), whose borrowing limits were restricted to 550,000 from 11.25 million. COMP suffered a similar consequence, with its borrowing capped at 18,000 from the previous 550,000 limits. The vote affected other altcoins facing liquidity concerns, Including Wrapped Bitcoin (WBTC) and Yearn.Finance (YFI).
The resolution announced via Compound Twitter hurdle lowered Yearn.Finance borrow cap to 20 from 1500. The users retracted from zero borrow caps on Wrapped Bitcoin to restrict lending to 1250. BAT and ZRX will contend with a recommended lending ceiling of 900,000 and 1,000,000, respectively.
Sushi and Link lost their borrowing limit, with the recommended value restricted to 750,000 and 45,000, respectively. MKR was slapped with a lending ceiling of 300 from 5000, with AAVE borrowing capped at 12,000 from 66,000.
Proposal Objective
The promoter of the lending cap proposal – Gauntlet, aims to fend off the insolvency risk facing altcoins from becoming a liquidation crisis. Also, Gauntlet sought to avoid price manipulation, as witnessed in Mango squeeze exploits. Besides high utilization, the Gauntlet proposal will eliminate the risk of shorting assets from the short position on size relative to asset circulating supply.
While Gauntlet did not reference the concerned incident directly, a risk assessment was completed for Aave. The modeling arose from the November 22 discovery of attempts by Avraham Eisenberg, known for hacking Mango Markets to exploit Aave protocol. Eisenberg targeted shorting Curve (CRV) amounts though an illiquid token on the protocol.
The attempt forced Aave into a loss of liquidating position leaving the slippage below expectations. The CRV short squeeze led to a $10 million loss for Eisenberg.
The awareness of the attempted exploit triggered Gauntlet’s proposal to freeze several tokens in Aave version 2, considered vulnerable as they are illiquid. The proposal is timely to prevent exploits given the current market turbulence capable of downing Compound Finance protocol, whose total borrowings are $654.7 million with collateralized assets value of $2.146 billion.