Harpoon Protocol — Terra Project Spotlight
Our previous Project Spotlight issues have covered Spar, Loop, and Kash — applications sourced directly from Terra’s DeFi ecosystem or building platforms directly on-chain (e.g., Loop AMM). In this issue, we will focus on an application-specific project building on top of Anchor — Harpoon Protocol.
Welcome to the fourth issue of Terra’s Project Spotlight series.
Harpoon’s Team — The Why
Harpoon’s team includes a full-stack development hailing from backgrounds in blockchain and financial software development, algorithmic trading, and marketing. Like many emergent projects in crypto, Harpoon’s origins start with the community, where ideas and relationships are forged in Telegram channels, Discord servers, and research forums.
“Through various groups such as the Official Terra Telegram, we came together and began this project to focus on allowing the entire community to seamlessly liquidate loans on Terra’s Anchor Protocol,” says Harpoon’s Front-End Team Lead.
The Harpoon team built a prototype of a front-end interface for user-executed liquidations of at-risk bLUNA collateral soon after. Following community feedback and input from the Anchor team, Harpoon created the first formal governance proposal on Anchor’s grant system — requesting 20,800 ANC tokens (capped at $120,000) to launch V1 and develop future iterations of the platform, such as creating liquidation pools and spinning up a Terra validator node.
Harpoon’s proposal passed, marking the first allocation of Anchor’s ANC-denominated community pool funds since the launch of the protocol back in March. Now, Harpoon is currently in its closed Beta with select Terra community members participating in the protocol’s on-chain mainnet.
So what’s the advantage of Harpoon for the ordinary Anchor user?
Navigating the mechanism of liquidations within money markets and other DeFi protocols that utilize the over-collateralization of assets is a challenging task. However, executing liquidations is also very profitable, especially as Anchor expands its staking derivatives on the supply-side to other chains beyond bLUNA.
“A common and popular topic in the Anchor community is the absence of tooling that allows users to easily participate in Anchor’s liquidations market,” continues the front-end team lead. “Harpoon Protocol was built with the non-technical person in mind — we embrace TFL’s motto of looking outwards.”
Harpoon’s vision is to alleviate the technical barrier for users to profit from under-collateralized bLUNA positions on Anchor, which is mainly confined to a small group of developers creating bots to capture profits from Anchor’s Liquidation Contract. By creating an intuitive UI for users to execute liquidations on Anchor manually, Harpoon hopes to level the playing field for liquidating at-risk positions within the protocol.
Let’s dive in.
What is Harpoon?
Harpoon is a user-executed liquidation platform for liquidating under-collateralized positions on Anchor’s money market via the Anchor Liquidation Contract. To better understand Harpoon, we first need to outline the basic mechanism of liquidations on Anchor.
At a high level, Anchor needs to prevent borrowers from defaulting on their loans issued in UST (collateralized in bLUNA) to avoid systemic solvency risks on the platform. This occurs by an incentive design that facilitates the liquidation of at-risk bLUNA collateral, meaning collateral whose Loan-to-Value (LTV) ratio has exceeded a maximum threshold. At-risk bLUNA collateral is induced by downward price conditions in the underlying collateral (LUNA), reducing the borrowing capacity of outstanding loans and triggering liquidations.
Open borrowing positions on Anchor that exceed the maximum LTV threshold (currently 50%) trigger Anchor’s Liquidation Contract to queue up the position’s at-risk bLUNA collateral. The collateral is subsequently fully liquidated or partially liquidated by a third party such as a user-deployed bot, where the underlying collateral is converted to Terra stablecoins that are used to repay the loan.
According to Anchor’s documentation:
“The Liquidation Contract acts as an over-the-counter (OTC) exchange between Cw20-compliant collateral tokens and Terra stablecoins. Using Anchor’s Oracle Contract as a price feed, conversions between any arbitrary Cw20 token-based assets and Terra stablecoins are facilitated.”
The execution of liquidations is performed via a bidding framework where bids are submitted directly to the Anchor Liquidation Contract. Bidders submit bids to the contract (denominated in UST), taking into account the CW-20 asset, size, and premium rate — a rate of premium the bidder is willing to pay for the at-risk collateral that is capped at 30%.
More succinctly, bidders profit from executing liquidations by purchasing the at-risk collateral at a discount to the current Oracle price via a competitive market of other bidders.
Executing bids is a zero-sum game between competing entities interacting with the liquidation contract. Naturally, liquidation bots that automatically parse at-risk positions and rapidly submit, retract, and execute bids based on variable market conditions dominate the current market for liquidations on Anchor. But that’s where Harpoon enters the equation.
Many Anchor users that desire to participate in the loan liquidation process are precluded from doing so due to technical barriers. Liquidations are primarily executed by user-deployed bots, meaning that a background in software development is necessary, or sufficient capital to hire someone to create a bot on behalf of a user is required.
With Harpoon’s V1, users can bid on at-risk collateral liquidations manually. The basic process flow is as follows:
- Alice connects her Terra wallet via the Terra Station Chrome Extension.
- Alice submits a UST bid to Anchor’s Liquidation Contract and selects a bid’s premium/discount rate (up to 30%). This bid is essentially a deposit into the liquidation contract. It is not tied to any specific loan/borrower address and, due to Anchor’s contract architecture, the user can only have one bid in place at any given time (the bid can be retracted at will).
- Once a loan is up for liquidation (it has exceeded Anchor’s safe ratio of 50% LTV), the user can attempt to “Liquidate” that loan, using their bid amount to pay off that borrower’s debt and win a portion of their collateral (or all of it) with a premium/discount.
Harpoon enables the above steps with a user-friendly interface, allowing users to configure and submit their bids via a dashboard presenting available liquidations sourced from the Anchor Liquidation Contract.
For most users, executing liquidations is not the primary appeal of Anchor, as 20% APY on UST deposits and unlocking bonded staking collateral for borrowing are the primary features. However, for users attuned to liquidation contracts and their incentive and mechanism design, executing liquidations on Anchor can be a potentially lucrative affair, especially as more staking derivatives are added to the supply-side and at-risk loans on the liquidation contract increase.
It’s yet to be revealed whether or not user-executed liquidations can keep pace with a competitive market of liquidation bots interacting with the liquidation contract. But Harpoon’s future prospects may help erode those concerns, including V2, which will come with an integrated analytics dashboard that showcases data about outstanding loans, collateral, and ongoing liquidations — the latter the most important for remaining competitive with bots.
“The Harpoon team is fully aware of the bots that are currently taking the majority of liquidations,” says Harpoon. “With this in mind, we have increased our dev capacity with some recent hires that will focus on the all-important V3. V3 will be a smart contract that is driven by an intelligent back-end that will be able to make liquidation/execution decisions based on market conditions on the underlying asset (bLUNA, bETH, bSOL, etc.) and activity in the liquidation contract.”
As a result, the end-user will be able to deposit various assets into the contract and the contract will take care of the rest. Harpoon V3 will be a fully automated liquidation engine that will pay the participants after each successful liquidation in their (supported) asset of choice with some additional features they can take advantage of.
“V2 and V3 are being built with future assets in mind pending the implementation of IBC,” continues Harpoon. “We will be able to integrate them seamlessly into the smart contract. V2 will be built initially as a user-friendly analytics page for the UI but will be ported to V3 with more in-depth analytics.”
Other developments for Harpoon on the horizon include:
- Spinning up a Terra Validator Node.
- On-chain liquidations.
Harpoon will be releasing an in-depth blog post soon, which will cover more granular details about the mechanics of the platform’s back-end, including the differences between full and partial liquidations. For more information about Harpoon Protocol, please check out their official social channels below.
And remember, if you’re interested in building on Terra, please feel free to explore some of the resources below. Don’t hesitate to reach out!
Harpoon Twitter — https://twitter.com/HarpoonProtocol
Harpoon’s Anchor Governance Proposal — https://forum.anchorprotocol.com/t/proposal-harpoon-protocol-an-elegant-ui-for-community-liquidations/369
Harpoon Job Openings — outreach@harpoonprotocol.com
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Application form to build on Terra:
Terraform Capital application form:
Terra community pool + Agora research forum:
Mirror community pool + community forum:
https://forum.mirror.finance/latest?order=activity
Anchor community pool + community forum:
