On Thursday, November 26th, the price of the Dai stablecoin (ordinarily $1 USD) exploded up to $1.30 on Coinbase as traders tried to snag up funds en masse to pay back, and thus keep afloat, their DeFi lending positions.
The Dai price jump, coupled with a rapid decline in ETH value, led certain borrowing positions within Compound to become undercollateralized, putting them at risk of liquidation.
The crux of the issue stemmed from Compound's reliance on Coinbase's Dai price as a reference. During this volatile period, the price feed on Coinbase was notably higher compared to other platforms because of the unexpected and massive rush of users towards Dai.
These events triggered over $100 million in liquidations within Compound, sparking widespread debate in the Ethereum community over whether Compound's reliance on a single price oracle was to blame or if it was just an unfortunate incident in DeFi's early development.
Manipulation or Not?
As soon as the liquidation wave on Compound was evident, theories emerged, suggesting the Dai price rise on Coinbase may have been due to manipulation, specifically a price oracle attack.
Yet, it's crucial to note that no concrete evidence points towards an attack. Instead, all signs suggest that organic trading actions and position liquidations were responsible, as highlighted by some Ethereum users online.
It appears that the extensive Compound liquidation issue wasn't primarily due to oracle failure.
The $1.30 price of Dai in trading was rooted in actual market dynamics rather than an oracle mishap.
There's debate over whether manipulation was involved; it's wholly plausible that the rush to purchase Dai to ward off CDP liquidation amid plummeting ETH prices led to the situation.
— scottlewis.canto (@scott_lew_is) November 26, 2020
Strength in Numbers?
Much criticism directed at Compound in the past day centers around its heavy dependence on a single price source from Coinbase.
However, that's not the entire picture: Compound's price determination involves time-weighted average prices (TWAPs) sourced from reputable decentralized exchanges for added reliability. As Uniswap's creator, Hayden Adams, pointed out:
“From what I understand, the impact of the Compound liquidation would have been harsher if the system hadn't incorporated Uniswap's price averages. TWAPs from Uniswap acted as a stabilizing factor, rejecting extreme pricing divergences even as Coinbase's oracle prices spiked.”
This serves as a testament to the robustness of Uniswap's TWAPs, showing they could enhance Compound's price oracle's credibility. Critics argue that Compound would benefit greatly by integrating more diverse oracle networks.
Chainlink’s Nazarov Chimes In
Chainlink is the premier decentralized oracle Chainlink stands as a prominent solution today in DeFi, powering a multitude of price feeds across various projects. DeFi It includes lending protocols like Aave, which shares similarities with Compound but utilizes a distinct methodology. Chainlink’s decentralized oracles.
Aave's strategic use of Chainlink means its Dai markets didn't face the same scale of liquidations, benefiting from aggregating multiple price feeds.
In response to the news, Blockonomi reached out to Sergey Nazarov, Chainlink's co-founder, to gain insights into what the Compound liquidation meant for the broader DeFi landscape; he stated:
“We predicted this exact exploit more than a year ago He previously addressed potential attack vectors at several events to inform the developer community. issued a public advisory In the midst of this incident, Chainlink's decentralized approach ensured accurate global pricing data, despite challenges such as gas price increases, maintaining the integrity of DeFi operations reliant on its oracle data.
At the very least, this Compound ordeal should prompt a reassessment among DeFi projects, encouraging consideration of integrating Chainlink's oracle technology to bolster their defensive mechanisms.
