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Venus Protocol Liquidation Manipulation Incident – What Happened?

Venus Protocol Liquidation Manipulation Incident – What Happened?

Venus Protocol’s XVS token was targeted and manipulated, leading to more than $200 million in DeFi liquidations and $100 million in bad debt.

This morning, Venus Protocol saw a massive spike in the price of XVS tokens. This spike was thanks to large orders and expectations on the new VRT.

The Price Manipulation Incident

Venus, Binance Smart Chain’s largest lending platform, suffered from significant price manipulations. Bad actors manipulated the price of XVS and ended up borrowing 4100 BTC and 9600 ETH. This led to the generation of over $100 million in bad debt. The Venus Protocol has had manipulations in the past as well, which were exploited before to loan 3000 BTC and 7000 ETH.

The Aftermath

The spike caused by large market orders and the limited, unstaked supply caused a massive fluctuation in market prices. The increased prices led to traders supplying and borrowing more collateral to buy XVS, with the trades carried out at high margins.

There was also increased price volatility, with traders also making profits thanks to the increase in price, creating a domino effect and several liquidations in the XVS market.

What Exactly Happened In The XVS Market?

Liquidations in the Venus Protocol work in the same way as those when go margin “long.” You can utilize your collateral and borrow more collateral to increase their positions, which can then be re-leveraged and adjusted. Liquidators look out for accounts that are over their margins and, in the case of the XVS market, over their borrow limit.

These accounts are then liquidated for up to 50% of the position, with a fee of 10%. The collateral that is seized is then sold by the liquidators, in this case, XVS, to recover the capital they used for the liquidation process.

However, the 10% swing, combined with market volatility, causes slippage, which further lowers the price of the seized asset. This causes a problem as more liquidations occur and the price of the seized asset keeps going lower, causing a loop until the point where they can liquidate no more. This is what happened in the XVS market to the Venus Protocol.

There Is, However, Some Good News

The good news, in all the bad, is that no funds were lost. There is; however, a negative balance thanks to the quick price drop and liquidators taking advantage of the prevailing situation. The Venus Protocol plans to cover the system shortfall in two ways, utilizing XVS and deploying its grant program.

Instead of selling the XVS into the market, the XVS Venus team will leverage them or OTC them to a partner under a long-term hold agreement.

Ensuring Complete Security

The Venus Protocol will re-visit each asset on Venus, working with them and lowering their collateral factors. This will ensure that mass liquidations do not occur again in the future. The team will also work with oracle providers to find a better methodology for updating deviations. The team also plans to reassess supply caps so that re-leveraging does not occur at specific thresholds.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.