Decrypting DeFi is Decrypt’s DeFi email newsletter. (art: Grant Kempster)last week was a wild one for the rapid, proof-of-stake network Fantom. A large holder of Fantom ’ s FTM tokens took out a massive lend and brought the network to its knees .
Things have cooled off since, but the episode brought to light how very traditional fiscal activity ( like lending and adopt ) can however wreak havoc on up-to-date technologies .
here ’ s the narrative of how a Fantom whale about crashed the network. ( Crypto networks don ’ thymine typically “ barge in ” in the traditional common sense of the password ; alternatively, they get sol expensive and congested that they become about impossible to use. )
The degen in interview reportedly goes by the pseudonym Roosh in the Fantom community, and he deposited $ 50 million deserving of FTM ( roughly 59 million FTM tokens ) on a DeFi protocol called Scream to take out a loanword for two other tokens .
shout is a lend protocol, like Aave or Compound, built on Fantom .
The two tokens were SOLID, from the protocol-to-protocol crypto exchange called Solidex ( learn more hera ), and DEUS, the native nominal for a Swiss-army fiscal services platform called Deus Finance. You can see the whale ’ mho wallet here .
so, to recap sol far : Roosh put $ 50 million of FTM into Scream to get out SOLID and DEUS .
The whale received 37 million of these two tokens because Scream, like equitable about every early DeFi platform, only executes over-collateralized loans. You must deposit more money than you receive. To mint MakerDAO ’ s DAI stablecoin, for exercise, you need to put in $ 1.5 worth of ETH in order to get equitable $ 1 worth of DAI .
The proportion for how much of one asset you can borrow for another is called the loan-to-value ( LTV ) ratio. It varies from platform to platform, asset to asset, and is chiefly a function of how volatile or exotic the asset you ’ rhenium adopt is. A highly volatile, small-capitalization cryptocurrency will likely have a high gear LTV. It may seem inefficient, but in crypto, where angry monetary value swings are inevitable, projects need that supernumerary, over-collateralized cushion .
In the shell of this Fantom whale, he put this accurate theme to the test .
After locking up $ 50 million in FTM on Scream and borrowing DEUS and SOLID, the whale then locked up his catch of those two smaller tokens in a four-year venture contract. thus, he ’ second levered and illiquid .
then the market began moving, and when Bitcoin starts moving, then serve altcoins ( like Fantom ). And as the value of FTM dropped, Roosh ’ s LTV proportion on Scream besides edged closer and closer to the level at which the protocol would begin liquidating ( i.e. selling off the underlying to make up the debt ) his position .
People within the Fantom residential district watched closely as this unfolded—after all, liquidating a $ 50 million military position would have been catastrophic for the health of any crypto net. But because Roosh was basically illiquid, he could not add to his collateral and stymy the liquidation .
finally, one of the members of the Deus Finance DAO lent Roosh $ 2 milllion to help prevent this .
Btw…did you tweet at Lafa or Dr liquid about causing a panic & loaning Roosh 2 milliliter very publicly or nah ? pic.twitter.com/Ir7g1tgSdN
— ☀️ Alltheway08 🏴☠️🦜 ( @ alltheway08 ) May 3, 2022
calm, a partial liquidation of 11 million FTM tokens occurred, and the price of FTM plummeted from $ 0.85 to $ 0.79, according to on-chain analyst Amna .
A second and third liquidation finally happened, dropping FTM to $ 0.76. “ Whale now only has 35 million FTM ( down from 59 million FTM ) as collateral, ” Amna wrote. “ Fourth and continuing liquidations bring whale down to 30 to 18 million FTM. ”
here ’ s what that looked like in a handy chart. The liquidations began on April 29.
via CoinMarketCap
so, even if FTM holders weren ’ t mindful of this particular extermination consequence happening, they were surely aware of the quickly declining respect of their holdings .
unfortunately, anyone who attempted to trim those holdings during this devolve would ’ ve been met with an ugly surprise .
Because you have enormous chunks of FTM being sold off entirely on-chain, transaction fees on Fantom absolutely soared .
Gas fees on Fantom over the past month. (via FTMscan)
This is equitable an average accelerator tip, but crypto security expert Chris Blec shared on Twitter that these cascading liquidations caused transfers to hit about 20,000 gwei ( the measured for how fees are measured ) at one point .
“ It ’ s expensive to get a [ transaction ] through in FTM. But FTM is cheap so it ‘s still low-cost. But it shows what a panic can do, ” he tweeted after. “ Imagine if this was the price on Ethereum. ”
And here ’ s where things can get in truth, truly dicey for a crypto network ( not barely Fantom ) : When a huge sum of a native keepsake is being sold off while by man, panicky investors may run for the exit. But because fees are high and transactions are slowly, they normally won ’ metric ton be able to exit their positions. More broadly, other DeFi projects built on top of the network are besides reduced to a snail ’ south pace .
And if you imagine that there are many other users who have borrowed assets on Fantom, they may have a unmanageable meter topping up their collateral as their transactions fail to go through, which could lead to even further liquidation ( and more on-chain action, and even more congestion ) .
And all the way down you go as natural process grinds to a freeze while prices plummet. And voila, that ’ s basically the recipe for a death spiral .
Exciting, no ?
obviously, this didn ’ triiodothyronine happen to Fantom, but it is a legitimate gamble. And Fantom isn ’ t the entirely chain that ’ south vulnerable to this kind of event. indeed be careful out there .
Decrypting DeFi is our DeFi newsletter, led by this essay. Subscribers to our emails get to read the essay first, before it goes on the site. Subscribe here.
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