Will OEV resolve a stablecoin de-peg?

Liquidations are par for the course.

Increasingly, defi is trending towards tokenized vaults and yield-bearing assets, which represent an underlying strategy or yield source.

1. In order for these synthetic assets to be liquid, they must have a like pair.
2. If there is yield, these synthetic assets will be listed as collateral, and borrowed against to amplify yield exposure.
3. Amplification by leverage == increased risk of liquidation.
4. Low liquidity on new assets == de-peg related casualties.

This sets the scene for a majority of TVL in Money Markets, which means that liquidations of looped synthetic assets are to be expected – and that these liquidations can be integrated into asset design.

On the topic of the @eulerfinance / @elixir Liquidation event on Avalanche, @CupOJoseph advises:

“If they used @Api3DAO the liquidation bots would have had to compete to update the oracle price, and most value would have been captured by the protocol.”

Joseph is speaking about OEV.

Picture an ecosystem of decomposers, whose nourishment is the liquidation bounty set by each Lending Market.

• Validators who assemble blocks.
• Liquidation bots.

These entities absorb millions from defi users, so that lending protocols do not sustain bad debt. It’s an inefficient system, but it’s what we currently have.

A new ecosystem of tribal decomposers are replacing the old world incumbents. Oracles can now hold auctions to sell price feed information to liquidators, front-running the power that validators used to have – accepting bribes to prioritize liquidation transactions.

The incumbent liquidators are getting frontrun by OEV solutions.

In order to activate OEV, the Oracles – @chainlink, @Api3DAO, @redstone_defi & @0xFastLane need protocols to implement OEV Feeds, rather than the standard price feeds, which are free.

So, the Oracles are offering to cut the protocols in on the action, but not the assets.

Isolated Markets and Curators:

1. The market will continue to provide incentivized leverage to long tail assets, with a high risk profile, and low liquidity.
2. Market participants will continue to get liquidated.
3. Curators like @Re7Labs and @k3_capital will be able to integrate OEV feeds at their discretion.

If you’ve ever run a growth campaign, or taken a look at the scope of OEV opportunities, you’ll know that this is an incredible resource.

AlphaGrowth is of the opinion that directing this value toward token holders, and borrowers will set a performance standard amongst assets and curators.

Now to this week’s events, deUSD depegged in a positive direction liquidating $500k of users funds in a levered loop.

What you might not know about the deUSD loops, is that they are a core strategy for a yield-bearing BTC operated by Solv on Avalanche.

This yield-bearing token, solvBTC.AVAX is a product of @SolvProtocol and Elixir.

Euler and Re7 Labs are responsible for part of the yield generation, as deUSD is minted against solvBTC and BTC.B deposits, and then put through loops on Euler to earn yield – which is then directed back into the vault.

This is how I imagine it works:

It’s likely that the $500k liquidation was an over-leveraged retail user, who flew too close to the sun. – It does mean that Solv’s strategy could use some improvement

Let’s assume that the deUSD minted by the solvBTC.AVAX vault were conservatively applied to Euler markets. – It doesn’t change the fact that users are going to max lev, and get liquidated.

The least they can do is implement OEV, and direct that value capture back toward the vault. The vault curator can now use the OEV rewards to make users whole and treat OEV rewards like a bug bounty in the case of a positive de-peg.

OEV enables new mechanism designs that can be used to redirect the capital of slip-ups or mishaps -- but, curators will need to be more bold in adopting these mechanisms, and creative in the application of OEV funds.

Will wrongful liquidations occur more often, or is OEV a bug bounty style stability fund to help soften the fall of new users?

Is OEV a rebate, a degen tax, a new revenue model for new types of oracles?

Or, do we ignore OEV, and solve this problem by mapping stablecoins to $1.

What could go wrong?