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A thread on how a $50M loan of the native asset on any major L1 can trigger a catastrophe 
The recent $ftm liquidation cascade opened up my eyes. I am a strong supporter of #defi but defi is still in its infacy and we have a long way to go. If you don't know what i'm talking about start here - https://twitter.com/megastuffs/status/1520280016881217538
In this thread, I'll be talking examples of the top 10 L1's and L2's on defillama (by TVL) and show you how we all are walking on such thin ice with lending and borrowing.
1 - ETH - Liquidating a $50M $ETH loan will have 9% slippage on-chain. This is best out of all chains because of deep ETH liquidity on-chain.
2 - Terra - Liquidating a $50M Luna loan will have 33% slippage on-chain. I do not know of a dex aggregator on $luna so this number might be lower. This is 4th best out of all chains. @CryptoHarry_
3 - BSC aka CZ chain - Liquidating a $50M $BNB loan will have 16% slippage on-chain. This is the second best out of all chains
4 - Avax - Liquidating a $50M $AVAX loan will have 35.13% slippage on-chain. This is 3rd WORST out of all chains
5 - Sol - Liquidating a $50M $Sol loan will have 32% slippage on-chain. This is 3rd best out of all chains
6 - Ftm - Liquidating a $50M $FTM loan will have 42.5% slippage on-chain. This is 2nd WORST out of all chains
7 - TRX - Idk why would anyone take a loan on their TRX except Justin, so I didn't check this chain. Lets just say its the worst for now.
8 - Polygon - Liquidating a $50M $Matic loan will have 62.5% slippage on-chain. This is worst out of all usable chains. It could probably crash the whole chain. The chain is already having a lot of issues and its not an understatement
9 - Cronos - Liquidating a $50M $cro loan will have 33.5% slippage on-chain. This is the 5th best out of all chains
10 - Arb - Liquidating a $50M $Eth loan will have 35% slippage on-chain. This is the 6th best out of all chains.
Why is this important?
For chains like $avax and $ftm, this can result in a death spiral where all loans will end up getting liquidated. You're like my borrow limit is safe and its at 50% rn. What happens when a 50M loan is liquidated?
For chains like $avax and $ftm, this can result in a death spiral where all loans will end up getting liquidated. You're like my borrow limit is safe and its at 50% rn. What happens when a 50M loan is liquidated?
The price on-chain drops 35%. Then someone who had 20% borrow limit remaining will get instantly liquidated and then it ends up liquidating more peeps under him/her and eventually you will be caught in the torrent as well.
This will trigger a liquidation cascade like we have seen before with $ohm and $time. In my eyes, only ETH and BSC has somewhat decent capacity to mitigate this but all other chains would probably go in a death spiral until all loans are liquidated.
So the case is actually not limited to just $FTM but can happen on any chain. @FantomKing is just a perma bull and didn't expect this. I don't see any problems with him taking such a big loan, its his choice after all.
How can this be prevented ?
I am not sure because these are smart-contracts and they usually have a strict course of action. Only way I can think of is by doing an OTC trade with someone who wants to buy asset at cheaper price and has enough money to settle the loan.
I am not sure because these are smart-contracts and they usually have a strict course of action. Only way I can think of is by doing an OTC trade with someone who wants to buy asset at cheaper price and has enough money to settle the loan.
Happy to hear thoughts of people who actually know how this can be prevented.
TDLR -
eth - 9%
bnb - 16%
sol - 32%
luna - 33%
cro - 33.5%
arb - 35%
avax - 35.13%
ftm - 42.5%
matic - 62.5%
trx - idk
eth - 9%
bnb - 16%
sol - 32%
luna - 33%
cro - 33.5%
arb - 35%
avax - 35.13%
ftm - 42.5%
matic - 62.5%
trx - idk
I know, that the liquidity is not sold directly on open market but still this is a scary scenario
