Proposal
Force liquidators to liquidate VAI positions first if the borrower eligible for liquidation has debts with several tokens. There would be a minimum amount of VAI to liquidate first (configured in the contracts with a VIP), to allow liquidators to liquidate the rest of positions if liquidating the VAI position is not profitable (considering the gas cost).
For example, given the minimum amount of VAI to liquidate first is equal to 1,000 VAI, if there is a borrower eligible to be liquidated, with the following debts:
- 1,500 VAI
- 3,000 USDT
Then, we suggest the protocol to force liquidators to liquidate first the VAI position (even being the liquidation of the USDT debt more profitable for the liquidator). In this case, a liquidator could liquidate up to 50% (close factor) of the VAI debt (750 VAI) first, and then the USDT debt can be liquidated (because the new VAI debt, 750 VAI, will be lower than the threshold, 1,000 VAI).
Several liquidations could be done in the same transaction. For example, the following sequence of liquidations, in one transaction, could be valid (if the user is underwater before each liquidation, of course):
- Liquidate 750 VAI (new VAI debt: 750 VAI)
- Liquidate 1,500 USDT (new USDT debt: 1,500 USDT)
- Liquidate 750 USDT (new USDT debt: 750 USDT)
- Liquidate 375 VAI (new VAI debt: 375 VAI)
The final debt positions of the user would be:
- 375 VAI
- 750 USDT
And the total liquidations was 1,125 VAI and 2,250 USDT.
On the other hand, if the initial debts of the user eligible to be liquidate are:
- 500 VAI
- 3,000 USDT
Liquidators will be allowed to liquidate the USDT or the VAI debts, because the VAI debt (500 VAI) is lower than the minimum amount to force liquidators to liquidate VAI (1,000 VAI).
Rationale
Following up our first post analysing VAI, and taking into account the development of the Peg Stability Module and the suggested risk parameters (suggesting the re-enable of minting VAI), we want to focus on the following finding:
VAI position is considered together with other borrow position: Compared to MakerDAO which allows users to only mint/borrow DAI, the minting of VAI in Venus behaves the same as a normal borrowing. When a user’s position is underwater (i.e. eligible for liquidation), the liquidators actually can choose to return another token in the debt and seize a portion of the collateral. When liquidation fails to restore account health and the liquidator chooses to return other assets instead of VAI, VAI becomes under-collateralized.
If Venus re-enables the minting of VAI, the debt positions of VAI will increase, and therefore the risk of shortfalls with VAI will be higher. We consider it necessary to protect the protocol and reduce the likelihood of generating bad debt involving VAI.
We welcome feedback and comments.