How KeeperDao makes the most of DeFi Liquidations
Over the last few years, DeFi has been booming in the world of blockchain, and just recently, NFTs have stolen the spotlight a little bit. Nevertheless, just looking at the numbers on DeFi Pulse, with more than $43 billion worth of assets locked into DeFi protocols, it’ safe to say that DeFi is here to stay.
The most significant proportion of assets is locked in lending protocols like MakerDao, Dyx and Compound. Whenever traders take out loans in one of those lending platforms, they usually have to deposit more than they want to take out due to cryptocurrencies’ volatile nature. For example, at a collateralisation ratio of 1,5, traders have to deposit $150 worth of ETH to take out $100 in DAI as a loan. Lending protocols set thresholds at which collateral will be liquidated to ensure that they can cover the loans. If that threshold in our example is set at a 1,3 of the loan taken out, if the $150 worth of ETH dropped to $130, the protocol would automatically sell the ETH off.
The parties liquidating these loans are known as “liquidators”, and they act as market makers who track loans, turning them into cash if the ratio falls. As a reward for keeping the protocol afloat, they typically receive between 3–5% of the loan value as a “liquidation bonus”. While this sounds like an easy thing to do, in practice being a liquidator comes with a few significant challenges.
Firstly, it requires a significant amount of capital to execute liquidations. If a $1 million loan needs to be liquidated, the liquidator needs at least one million spare change. Secondly, it’s very unpredictable when liquidations opportunities arise, as they tend to be very periodic. During high volatility or a bear market, many opportunities may arise, while there are less when the markets are bullish. Thirdly, constantly monitoring the market requires the proper infrastructure, which is costly to maintain. Finally, a major issue, especially with the most recent increase in Gas price on Ethereum, is paying transaction fees. All these make it nearly impossible for average investors to act as liquidators.
KeeperDAO is offering a solution that allows traders to pool their assets to generate passive income by taking advantage of different arbitrage and liquidation opportunities they wouldn’t otherwise have access to.
KeeperDao is offering a shared liquidity pool where anyone can borrow to leverage on-chain opportunities. The profits from executed liquidations and arbitrage trades are returned to the pool and distributed across liquidity providers (= all traders locking up tokens in the liquidity pool).
Benefits of KeeperDao include that capital and profit are shared. This way, individuals can benefit from opportunities they couldn’t seize by themselves, such as big liquidations. It also reduces the competition in so-called Priority Gas Auctions. Whenever a liquidator wants to execute a liquidation on Ethereum, they’ll need Gas to pay transaction fees. To ensure that their transaction is prioritised, they’ll need to pay higher amounts of gas. If liquidators compete with each other, they’ll naturally drive up the price of gas in these auctions. However, by all working together as part of KeeperDao, gas costs will decrease while liquidators maximise profits for themselves and consequently the DAO.
As the name already suggests, KeeperDAO is a decentralised autonomous organisation governed by its token holders who can vote on important decisions. Other vital players in the DAO are liquidity providers. They deposit ETH in the protocol, and, in return, they earn a share of the profits proportional to the liquidity they provide. kETh represents their share of liquidity, also called kToken. As returns are paid out on these tokens, they turn into yield-bearing tokens similar to fixed income securities in traditional markets. Profits are paid out in the native currency of the protocol: ROOK.
The other essential participants in the KeeperDao protocol are keepers. They are the ones keeping an eye on the markets and seizing arbitrage opportunities between DEXs, and executing liquidations.
For traders, there are two main ways to participate in KeeperDao. Firstly, locking up liquidity in the pools to earn ROOK and secondly to use the “Hiding Game”. The hiding game was recently launched and routed trades and loans through the KeeperDao ecosystem, seeking to extract any arbitrage and liquidation profits. The user receives these profits in ROOK.
To ensure that capital isn’t underutilised, all assets held by the liquidity pool will constantly be loaned out on other DeFi markets such as Compound and dYdX.
Since its launch in 2020, KeeperDao has captured a lot of attention from the DeFi space and continues its growth trajectory. To allow our traders to get involved with ROOK, we’ve listed the token with BTC pairs on our exchange.