Scaling Fuse lending markets with Backstop Protocol (B.Protocol)

Hello everybody,

since I took notice of the jointly launched “GMI: Hot Tub” Fuse Pool of Bankless DAO and Index Coop on 4/5/22, I’ve gotten me permission to relay the concept of a backstop support to new Fuse Pool admins/Fuse Pool operators.

Tldr; Below you’ll read about, how such an integration with Backstop Protocol (b.protocol) would allow for:

  • the offering of higher Collateral Factors (LTV) due to a more robust liquidation mechanism.
  • No need to run liquidation bots by 3rd parties or by the team (democratizing the liquidation process).
  • Risk analysis of the market that can provide quantifiable insights into each asset in the pool.

We describe a lending market implementation on top of Fuse with B.Protocol as a liquidation engine. The implementation will allow to create new markets with higher Pool Risk Score and/or better collateral factors in a more scalable manner.

Author: yaronvel
Date of creation: Feb 15 '22

Market risk and liquidations

In our view, the risk of a market is determined by three parameters, namely:

  1. The integrity of the admin, i.e., the likelihood it will do either malicious operations (such as setting a malicious oracle) or reckless operation (e.g., set 99.9% collateral factor to TRON token).
  2. The integrity of the price oracle.
  3. The integrity of the liquidation process - failing to liquidate in a timely manner will result in lost of funds. Lack of trust in the liquidation process results in too conservative collateral factors.

While the first parameter is somewhat mitigated by a whitelisting process, and the second parameter is mostly solved by relying on chainlink oracles, the 3rd parameter suffers from lack of transparency.
This lack of transparency is not unique to Fuse, however it will amplify in a future with many money markets and exotic assets.

B.Protocol

B.Protocol pool user deposits, into a backstop, toward liquidations, and then automatically sell the seized collateral according to a new AMM formula (augmented with chainlink price feed to fetch the current market price).
We are already live over Liquity, Hundred finance (which is compound compatible), and Vesta finance. With over $200m TVL.

For Fuse market we extend our Compound compatible implementation in two orthogonal directions:

  1. We will allow cTokens to be deposited at the backstop. this way cUSDC will get an apy both from the usual interest rate, and from liquidation proceeds and from other backstop incentives.
  2. The admin of the market will be a smart contract which gives priority to the users’ backstop in the liquidation process. This is done by controlling the seizeGuardianPaused storage.

Further the admin contract will route some of the admin fees to the users’ backstop liquidity providers, and will control the liquidation penalty and collateral factors.

Improvement over the current status quo

Markets that decide to opt-in into B.Protocol liquidation system could have on-chain transparency on how well they could handle liquidations and to justify the existing liquidation factors.
Further, our simulations show that such architecture could handle liquidations much more efficiently.
Indeed, current liquidation bots immediately try to arbitrage the seized collateral, and are bounded by the slippage that DEXes offer.
Fully automated market makers such as Uniswap V2 or Sushiswap suffer of capital inefficiency, and require over $100m of liquidity to handle $5m of liquidations.
Market makers such as Uniswap V3 or Curve V2 suffer from lower liquidity in times of sharp market movements.
The following graph shows that B.Protocol can handle bigger amount of liquidations w.r.t xy=k amms

and more details over the simulation are available at our white paper .

Call for action

We are at the final stage of implementation. And reach out to projects that plan to start their own market on Fuse to contact us and consider using our backstop.