Post-Mortem Released after Venus Protocol’s String of Massive Liquidations

The popular lending platform on the Binance Smart Chain (BSC) has seen a tremendous dip after concerns of manipulation spooked investors.

By
Chung Yee
on
May 31, 2021
Category:
BSC News

The Post-Mortem

Venus Protocol (XVS), a popular lending platform on the Binance Smart Chain, suffered massive liquidations as a result of its volatile price swings on May 18, 2021. On May 31, 2021, post-mortem of the incident was released on the official blog.  

The volatile price swings were almost indicative of price manipulation, leading many to believe it was a targeted effort to exploit the protocol for profit. 

In the post-mortem, the team acknowledged the need for accountability, and that the delay had led to more FUD (Fear, Uncertainty and Doubt) surrounding the protocol. At the time of writing, the price of XVS stands at $32.59, a massive 77.6% dip from its all time high of $146.82 on May 10, 2021. 

Source

  

The post-mortem identified the critical flaws in the protocol and promised a change in management and deploy better risk management. This is done through a new Venus Council wherein the voting weight and control will be delegated to. The team also disclosed a loss of $77 million from the protocol, which will be restored by way of compensation to all XVS holders from its distribution fund and protocol revenue. 


Flaw in the Liquidation Module?

It is not easy for a project to regain the confidence of its users after such a catastrophic incident. There is usually an oversight that has allowed the entire system to lose its integrity, which can be extremely hard to recover from. The incident took place after a spike in price of the XVS token from $76 to $144 allowing its holders to use these tokens as collateral to buy other tokens. The sudden dip had caused the loans to be undercollateralized, and the collateral was then liquidated by the protocol. 

Source

This event caused massive losses to the protocol. These losses are classified as bad debts because Venus can no longer recover such losses from the users who incurred the losses. The founder of Venus Protocol, Joselito Lizarondo was partly blamed for the poor oversight and management of the protocol as a result of his health issue, and will be replaced from his current role. 

This event led to the protocol taking two very decisive steps. First, the change in the leadership by restructuring the management. Secondly the introduction of a better risk management system that includes an independent risk committee.  


Can Venus Recover? 

There was much excitement before the unfortunate incident with the introduction of the Venus Reward Token (VRT) that was supposed to be airdropped to XVS holders. The community that operates in the DeFi space has found the entire fiasco rather disconcerting for not having enough safeguards in place to guard against price manipulation. Although no code exploit or organizational abuse has been identified, the acknowledgement from the post mortem result identifying human oversight and lack of proper risk management as the main cause has left a bitter aftertaste for investors. 

The report has outlined a compensation plan with the hope to restore its users’ confidence. It has also put forth a plan for optimization of internal management procedures and standards coupled with a more comprehensive risk management plan. These steps are remedial in nature. The main question that is being asked by the wider community is: why aren’t preventive measures put into place, especially when large sums of money are involved? The road to recovery will be a bumpy and challenging one, and it may take more than compensation packages to regain the trust of users for Venus. 


Closing Thoughts

In short, a DeFi user has to properly evaluate the platform that they wish to participate in. Many retail users may not have the know-how to manage their risk, and it is up to the protocol to maintain a safe investment space. While Venus is taking steps in the right direction, they will need to follow through on restructuring their risk management in order to regain their former glory on the Binance Smart Chain.


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Chung Yee

Chung Yee has a legal background and has been involved in research works for the legal and compliance industry. Writing is his passion, centered on topics such as the blockchain and finance.

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