Mass Liquidations On Compound Have Turned Attention To Chainlink As Critical Tool For Lending Platforms

After mass liquidations on leading DeFi lending protocol Compound members of crypto Twitter are calling for developers to steer away from using oracles pulling price data from a single or even a handful of exchanges.

On Thursday, both Bitcoin and Ethereum suffered price crashes exceeding 10%, according to data from Coinmarketcap. The crypto market crash sent investors fleeing towards volatility-resistant stablecoins. As a result, Dai’s price spiked as high as $1.3 on Coindesk Pro and Uniswap. The price spike caused over $85 million worth of positions to be liquidated on Compound, according to on-chain data reviewed by BitpushNews. The largest liquidation led to a yield farming address to have 46.2 million Dai repaid and 49.8 million Dai seized.

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Compound allows users to borrow assets, including Dai, as long as they have provided collateral worth more than they have borrowed. When the value of the amount borrowed exceeds the user’s borrowing capacity, their position is liquidated by arbitrageurs who repay up to 50% of assets the user borrowed while also helping themselves to the collateral attached to the loan.

When Dai’s price suddenly pumped 30% on Coinbase Pro and Uniswap, loans involving Dai became under-collateralized and were liquidated. In total, 124 users were impacted by the liquidations, founder of Compound Robert Leshner said in a statement.

Compound uses Coinbase Oracle for account liquidity calculations and cross-references with 20% of the Uniswap time-weighted average price, according to Leshner. Unfortunately, both Coinbase and Uniswap recorded the inflated Dai price, allowing for the mass liquidations. Other exchanges including Kraken and Bitfinex reported relatively stable Dai prices which would not have triggered the liquidations.

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Founder of Uniswap, Hayden Adams, took to Twitter after the event to highlight that the liquidations would have been much worse if Compound had been using only Coinbase for liquidity calculations.

Adams argued that the cross-reference with Uniswap caused the most extreme prices to be rejected. However other popular crypto commentators quickly countered Adams, arguing that lending protocols should pull price data from a variety of sources using an oracle platform like Chainlink to avoid these types of errors.

“A lending platform with over $1b in borrowed assets uses a single exchange source as their sole price feed,” Twitter user DeFi God noted. “No to mention Cuckbase is probably one of the worst exchanges.”

The user went on to argue that using Chainlink oracles — which pull price data from various sources — to set liquidity calculations would prevent artificial price manipulations from causing an event like the Compound liquidations.

“This is why Chainlink is the de-facto standard, market leader, and most trusted oracle network in crypto. At this point, if you are running a lending platform or a synthetic debt platform and you are not using Chainlink oracles to gather sufficient market coverage what are you even doing?” DeF iGod wrote. “These actions are entirely egregious at this point, and Compound had numerous opportunities to rectify. So why didn’t they?”

They went on to highlight that lending platforms using Chainlink to secure their price feeds, including Aave, were unaffected by the price spike on Coinbase and Uniswap.

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At the end of his statement, Leshner called for a review of the Compound protocol. He suggested several avenues for improving the platform, including the sole reliance on Uniswap to check liquidity calculations.

“This liquidation event should be a wake-up call to calibrate the protocol, which has scaled rapidly over the summer,” Leshner wrote. “I recommend that the community discuss what steps, if any, should be taken to prevent similar liquidations from occurring in the future.”

By Emily Mason

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