Benqi USDC De-Peg Risk Radar Insights
Analyzing potential risk vectors during the USDC de-peg on the Benqi protocol
USDC De-Peg Overview:
- On Friday 10th of March, 2023 Circle the USDC custodian revealed a $3.3 billion exposure to the collapsing Silicon Valley Bank.
- Upon the Circle announcement to exposure, USDC depegged from its $1 value target
- It traded for a low of $0.87 before the announcement that SVB depositors will be safeguarded by the US government, bouncing back to its intended trading price of $1 within two days
- This debacle represents the largest U.S bank failure since the 2008 financial crisis
- Given the high adoption of USDC in DeFi, its de-peg had large repercussions for Benqi and many more protocols
Benqi Protocol Impact
- Liquidity — The Net Liquidity Flows metric shows the inflows, outflows and supply netflows (deposits minus withdrawals) of liquidity into the protocol on an hourly basis.
- The protocol experienced a total of -$18,963,888 flows from Friday to Sunday
- The biggest withdrawal was of -$7,030,871 worth of BTC.b made on Friday at 8AM UTC
- The biggest hourly deposit was made on Saturday at 1PM UTC for $5,447,853 mostly in BTC.b and Avax
The Net Liquidity Flows metric can help a DeFi lending protocol protect against bad debt by providing real-time information about the inflows, outflows, and netflows of liquidity into the protocol. The metric can be used to identify potential liquidity risk vectors that can trigger activity among its issuers. For example, if the protocol experiences a large outflow of funds, it could indicate that users are withdrawing their funds because they are concerned about the safety of the protocol, which could lead to a potential liquidity crisis. Conversely, if there is a large inflow of funds, it could indicate that users are confident in the protocol’s safety and stability.
By monitoring the Net Liquidity Flows metric on an hourly basis, the protocol can quickly respond to any liquidity issues, adjust its risk management strategies, and take measures to protect against bad debt. For example, the protocol may decide to increase collateral requirements or reduce the loan-to-value ratios on its loans to reduce its exposure to risk.
- Liquidations — this indicator shows the record of all liquidations that have taken place in the Benqi protocol over time.
- In total from Friday to Sunday, $60,987 of debt was liquidated
- The biggest liquidation that occurred was of $21,638, in which the the user was borrowing USDT with USDC as a collateral
- Coincidentally the second biggest liquidation was of a user borrowing USDT.e with collateral of USDC.e, this liquidation was of $16,387. Later on in the weekend this user got liquidated again for $8,192 with the same trade
- All liquidations above $2,700 were executed by the same liquidator contract, available here
- This address generated a total profit of $5,477
- Five different liquidator addresses processed a total of 18 liquidations during the weekend
The Liquidation History indicator can help a DeFi lending protocol protect against bad debt by providing information on the risk profile of its borrowers and the effectiveness of its liquidation mechanisms. By analyzing the data provided by the indicator, the protocol can identify trends in liquidations, such as the types of collateral being used and the sizes of the liquidations, to assess the overall risk in its lending portfolio. For example, if there is a high number of liquidations with the same type of collateral, the protocol may consider adjusting its collateral requirements to reduce its exposure to risk.
Moreover, the data can help the protocol improve its liquidation mechanisms and prevent bad debt by identifying any weaknesses or inefficiencies in the current system. For example, the fact that five different liquidator addresses processed a total of 18 liquidations during the weekend suggests that the protocol has different liquidators monitoring the loan ratios. However, the fact that one liquidator contract was responsible for all liquidations above $2,700, and generated a total profit of $5,477, may suggest that there may be room for improvement in the efficiency of the liquidation process.
- Whales — this indicator tracks large depositors’ loans, repayments and liquidations. In this case it show itself useful to analyze which whales were borrowing and later buying USDC in order to profit from a potential re-peg
- The top three whales following the first one, which belongs to a leverage staking yield aggregator protocol, were involved in the borrowing activity of USDC
- This can be noticed in their addresses available here: 1, 2, 3
- This trade consisted in depositing a different asset into the protocol, most users chose USDT, in order to borrow against it and later on buy USDC and potentially benefit from the asset regaining its peg
The indicator that tracks large depositors’ loans, repayments, and liquidations can help a DeFi lending protocol protect against bad debt by providing information on the borrowing behavior of its largest users. By analyzing the data provided by the indicator, the protocol can identify potential risks and vulnerabilities in its lending portfolio, such as concentration risk or excessive leverage.
In this case, the indicator revealed that a group of large depositors, or “whales,” were borrowing USDC and buying it back later in the hope of profiting from a potential re-peg of the asset. This information could be used by the protocol to assess the risk associated with this activity, such as the potential for a sharp drop in the price of USDC if the re-peg did not materialize.
Furthermore, the data provided by the indicator can be used to improve risk management strategies and prevent bad debt by identifying trends in borrowing behavior. In the case a significant portion of the borrowing activity is concentrated among a few large users, the protocol may consider implementing measures to reduce this concentration and diversify its lending portfolio.
- USDT Net Loans Flows — this indicator monitors inflows, outflows and netflows of borrowing activity. Moreover, this provides further proof of users positioning for the USDC re-peg.
- It can be noticed that the market received and increased in borrows towards the beginning of the weekend
- This trade consisted in users borrowing USDT in the beginning of the weekend when the de-peg was the biggest to buy USDC at a lower price
- Later on in the weekend when USDC started to regain its peg, it can be seen how the market started to receive loan repayments from users
- Since the beginning of Friday there has been a total of $7,034,411 in borrows and $5,036,280 in repayments
- The single biggest borrow of USDT during this timeframe was of $1,121,876 made on Saturday at 10AM UTC
Finally, the Net Loans indicator for USDT revealed that users were borrowing USDT at the beginning of the weekend when the USDC de-peg was the biggest, in order to buy USDC at a lower price. This information could be used by the protocol to assess the risk associated with this activity, such as the potential drop in the price of USDT in case many liquidations would have to be processed, because of a USDC further de-peg, and the liquidity in the ecosystem was not enough to cover USDT positions accordingly.
