BSC's Venus Protocol Left With Bad Debt After Liquidations

Binance Smart Chain’s most popular lending protocol, Venus, experienced a massive string of market liquidations totaling over $200M on May 18, and Venus, itself, has been left with $100M in bad debt because of it.

The liquidations were primarily caused by the massive price swing of Venus’ governance token, XVS. The token jumped 88% from $76 to $143 and then crashed 50% to $72, all over the course of six hours on May 18. The price of XVS has further spiraled since, hitting lows of $32 on May 19.

(Coinmarketcap)

Under-Collateralized Liquidations

Venus, like other DeFi lending protocols, allows users to borrow various cryptocurrencies and stablecoins by putting up other over-collateralized crypto-assets. Venus users are typically allowed to borrow between 40% and 75% of their collateral value, depending on the token used for collateral.

In practice, this means if a token has a collateral value of 75% and a user puts up $100k worth of that token, they can borrow up to $75k worth of a different token. The borrowed loan is then paid off with interest over time.

But if a user borrows the full $75k and then the value of the token they put up as collateral plummets below $75k, the loan becomes under-collateralized and a liquidation event is triggered. When that happens, the original collateral is used to pay back the outstanding debt.

Bad Debt

So when the XVS token suddenly spiked in value, borrowers were able to use it as collateral at the new, vastly increased $140+ price point. Then, when the price dropped, many of those XVS loans became under-collateralized, triggering the $200M liquidations.

But because the price swings were so huge, some borrowers realized they would be better off permanently defaulting on their loan, keeping the tokens they borrowed and permanently losing their now-diminished XVS collateral.

This resulted in Venus getting stuck with over $100M in “bad debt,” or debt that will never be paid back.

Potential Manipulation

In an analysis thread posted on Twitter, The Block researcher Igor Igamberdiev said the XVS’ price swing and the resulting liquidations were the result of price manipulation due to XVS having low liquidity on Binance, where most of the trading occurred.

Igamberdiev pointed to two traders who left the majority of the bad debt. One borrowed 4.2k BTC ($160M) for 1M XVS collateral ($50M at current value). The second borrowed 13.4k ETH ($35M) for 490k XVS collateral ($24.5M at current value).

(Source: @FrankResearcher)

In a post-mortem report, Venus founder Joselito Lizarondo said that market volatility led to cascading liquidations, but that the protocol worked as intended.

Although, Lizarondo also said, that to avoid future mass liquidations from happening again, Venus will revisit each supported asset on the platform to safely lower collateral factors, work with oracle providers to find a better methodology of updating deviation, and re-assess supply caps for assets to ensure re-leveraging doesn’t occur at a certain threshold.

Lizarondo noted that the XVS price spike was caused by large market orders and excitement for the upcoming Venus Reward Token (VRT). VRT will be airdropped to XVS holders based on a snapshot taken on May 17, the day before the spike. And the drop was due to traders securing profits.

But, he said, while Venus was left with a negative balance, no funds were lost because Venus will deploy its grant program and utilize XVS to cover the system shortfall. The XVS from the grant program will be leveraged with oversight from the Venus Team or directly traded to a partner with a long-term hold agreement, and will not be sold into the market.