Efficient Frontier
Published in

Efficient Frontier

Decentralised Finance (DeFi) Liquidations — A Business Opportunity Assessment

Subscribe to my email list

The following is an internal business opportunity assessment I wrote recently for Efficient Frontier. This is the type of analysis product managers and/or business executives should do as they weigh and explore directional alternatives for their company. In the “traditional world”, a phrase commonly used in crypto to refer to any business outside of crypto and blockchain, it is highly uncommon to publish something like this. Yet, in crypto, the culture is often, but not always, highly collaborative and open. Among many of us there is a knowing that we are in this together. It takes a village to construct a new economy. I love this about crypto. Enjoy!

Note after the initial publishing of this article: We decided to pass on this opportunity for now and to keep an eye on it. We are passionate and excited about DeFi yet due to the current state (infrequent liquidations, capital requirements to have standing at the ready which could be deployed elsewhere more productively and the limited current overall financial opportunity). This is a decision that is right for our firm at this time yet I do not want to discourage any of my new friends who I met during this investigation from continuing as we all have different opportunity costs and overall strategies. Go get it!

Executive Summary

  • Developing a liquidation capability for DeFi may be an attractive product line for Efficient Frontier but it is not a large enough to be the central focus of the company
  • During the previous 365 days, $2,123,637 have been earned by liquidators (or have been executed internally by the DeFi platforms themselves due to insufficient liquidator partners)
  • While DeFi is expected to see rapid growth in the next 5 years DeFi liquidation revenues are likely not to exceed $110 mill dollars annually. This is not a massive market.

Why this may be an attractive opportunity for Efficient Frontier

  • Current players building liquidators may not have our professional capabilities and access to capital
  • The market is small and likely will not attract the attention of heavy professional competition
  • It is very early — this may be an advantage
  • If we become involved in DeFi we will be there when other opportunities arise. Dydx is already looking for market makers for its exchange.
  • Much of DeFi is in San Francisco making business development accessible

Key Open Questions

  • How profitable are liquidations
  • How competitive is the current market
  • What does it take to create an edge in running liquidations
  • Do gas costs erode profits
  • Does the fact that liquidations happen when markets are highly volatile create risk that cannot be hedged
  • To what extent can DeFi lending be used to access capital needed to run liquidations
  • What resources would it take to enter and compete in this market
  • How does this compare to other investment opportunities Efficient Frontier is considering


Over the previous year (October 2018 to 2019) $58Mill in loans have become under collateralized on MakerDao, DyDx and Compound. “Keepers” or “Liquidators” act as Market Makers (or miners) monitoring loans that become undercollateralized and are paid 3% to 5% of the loan amount when successfully liquidating a loan. During the previous 365 days, $2,123,637 have been earned by liquidators.

Developing a liquidation capability for DeFi may be an attractive investment area for Efficient Frontier.

(DeFi Liquidations 10/14/18 to 10/14/19)

Growth of DeFi

The amount of capital users of DeFi are “locking up” in the platforms has increased by 2.6X in the last year going from $171,000,000 to $444,000,000. dydx grew 33x. The hype around lending crypto is one of the most talked-about subjects and is expected to fuel further growth.

This article makes a comparison of DeFi leading to the global peer to peer lending market. The global peer to peer lending market is expected to grow at CAGR of 51.5% from 2016 to 2022 with the total market expected to reach $460 billion dollars by 2022. This article suggests if DeFi were to become 5% of the peer to peer market it would be a $23 billion dollar market.

Liquidation Opportunity Growth

If you believe in crypto and you believe in lending its not hard to imagine a 10x growth rate to the total DeFi lending space in the next 2 to 5 years annual liquidation revenues will be $24mill. If DeFi becomes as large as peer to peer lending liquidations become a $110 mill dollar market annually. (This assumes liquidations remain 0.48% of total $ locked in DeFi).

This is not a large enough market opportunity on its own to excite a venture investor however it could be a meaningful product area for Efficient Frontier.

There are some concerning near term signs that merit deeper investigation. MakerDAO’s growth has been flat over the last year. Dharma pivoting moving off of their smart contract infrastructure to Compounds lost nearly all of the $18Mill once locked in their platform. Other players to investigate are InstaAPP, NUO, BZX.

It is early

It is very early days for DeFi liquidations as dydx only released its Liquidator reference to jump-start developers algo 30 days ago. Conversations on Telegram suggest there are 15 players experimenting with these bots today, 3 to 4 of which may appear more serious having written their own algos to achieve needed speed and increased functions.

Executing liquidations is tricky

  • Intensive capital requirements — In order to liquidate a $1m loan the liquidator needs $1m to do it.
  • Highly periodic — Liquidations come in bursts with major market moves. On Sept 24 $8.2M was liquidated in a single day and roughly $320k in liquidation revenues were earned. (not including gas and other costs). 30 days can elapse with no significant liquidations taking place.
  • Watching Loans — a monitoring system is required to watch loans that are at risk of becoming under collateralized
  • Watching MakerDAO Price Oracle — The ability to watch the MakerDAO price oracle (everyone using this for market prices) and predict when it will change price as well as how this flows through to the liquidation key moments is key.
  • Gas Prices — can erode profits can this be navigated?
  • Hedging — I’ve read that hedging is part of some players strategy to offset movements in PETH, ETH and other volatile assets
  • Borrowing — The system may need the capability to programmatically barrow capital from the DeFi ecosystem in order to pay off loans.

Other opportunities in DeFi

DeFi is composable by design, meaning it is very easy to build products in DeFi by building on other protocols. It may be possible to use DeFi to get loans to finance liquidations. It may be possible to us DeFi to earn interest on capital reserves we hold in order to be ready for liquidations. We may be able to provide market making services to dydx. It is very likely that other opportunities will arise once we are engaged. There may be opportunities to offer borrowers services to prevent liquidations. If a borrower pays 10% when they get liquidated it might be worth some % to prevent it.

Hiring Exiting Liquidation Bot Developers

To jump-start our activities it may be possible and attractive to hire independent players who are already developing bots. I was able to reach one guy who lives in London who took the dydx bot and rebuilt it to get better speed and other capabilities I’ve outlined here. He may be open to considering employment or payment for his knowledge. I am sure there are others.

Key Risks

  • Liquidations are not profitable
  • The market is already too competitive
  • Liquidations are not frequent enough to build a test an effective strategy
  • Liquidations become less frequent even as lending increases
  • The total DeFi lending fails to grow

Next Steps

  • Review this material internally
  • Decide if getting answers to the key questions is worth the time
  • Explore a possible partnership with dydx that includes a retainer and or rebate for market making on their DEX in addition to running a liquidation bot.
  • If so Chris and Andew can do a lot of this. We will need Chen to help with some of the deeper blockchain analysis.

Subscribe to my email list




With over 12 years of high frequency and algorithmic trading experience, our technology powers weekly over $1 Billion of trade. We’re passionate about digital assets and our mission is to bring professional, trusted technology that adds value to the industry and the markets.

Recommended from Medium

What Is The Tenderbake Upgrade Of Tezos?

Introducing PowerKee — A decentralized cryptocurrency network that prioritizes privacy secured by…

Bitcoin is ready for the biggest breakthrough in 2020 — to a new record level

Did Warren Buffett and Charlie Munger Change Their Mind on Bitcoin?

MemeBank is on Medium

Hackers Now Stealing Your Cell Number & Money

Earn.com — Not for Wage Earners

Full Stack Bitcoin Dapp Tutorial

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Chris Mann

Chris Mann

Customer-Obsessed Product Guy, @IBM, @Coremetrics, @Bizo, @LinkedIn, @1Password, people, data, desire, grit, electric bass, family…

More from Medium

What are Neo-banks and How do They Operate?

Ovoro, refining crypto trading

Our Investment in Nautical Commerce: Infrastructure for Marketplace Operators

Investment Thesis Fego.ai