In the wake of Yearn Finance’s YFI collapse, dYdX’s liquidation system has run into trouble. This incident cost the protocol’s insurance fund $9 million, but user funds were not put at risk. We provide an update.
DYdX’s insurance fund takes a hit as YFI falls
On the night of November 17 to 18, the YFI token of the Yearn Finance decentralized finance (DeFi) protocol experienced an impressive fall in its price, conceding 45% in just a few hours. Shortly after the events, Antonio Juliano, founder of dYdX’s decentralized exchange (DEX), spoke out, calling it a case of market manipulation on YFI aimed directly at the application:
This was pretty clearly a targeted attack against dYdX, including market manipulation of the entire $YFI market
We are investigating alongside several partners and will be transparent with what we discover https://t.co/djWHaaPIua
– Antonio | dYdX (@AntonioMJuliano) November 18, 2023
Indeed, it turns out that the liquidations generated on the DEX after the significant price shift put pressure on the normal operation of the system provided for this purpose, forcing dYdX to resort to its insurance fund.
A total of $9 million was required to regularize the incident. However, the protocol teams confirm that user funds were not affected :
” Last night, around $9 million from the dYdX v3 insurance fund was used to fill the gaps in liquidations processed on the YFI market. The v3 insurance fund remains well funded with $13.5 million remaining. No user funds were affected and our team is working to investigate the event. “
The actions taken by DEX
Following this, protective measures were taken by the dYdX teams to limit the risk if such a scenario were to occur again in the future. As a result, 17 tokens have had their margin requirements tightened for trading:
As an immediate measure, we have increased initial margin requirements for less liquid markets: $EOS, $ZRX, $AAVE, $ALGO, $ICP, $XMR, $XTZ, $ZEC, $SUSHI, $RUNE, $SNX, $ENJ, $1INCH, $CELO, $YFI, $UMA, $SUSHI
We will continue to monitor, but believe this to be an important first…
– dYdX (@dYdX) November 18, 2023
While the reasons for this manipulation of dYdX are still unclear, if indeed it was a manipulation at all, there’s no doubt that this incident will teach us a great deal about the protocol. It’s worth pointing out that the insurance fund is designed to cover just such an eventuality.
In this regard, Antonio Juliano has announced a series of functionalities that investors will be able to find in dYdX V4, and which, a priori, would have greatly reduced the impact of the YFI collapse on the liquidation system. These include, for example, the impossibility of withdrawing funds while a negative position is still open :
On the dYdX Chain:
– Updating markets will be much easier, resulting in more desirable & liquid markets
– Maintenance margin will be updatable (it is not in v3)
– Maintenance margin scales with position size (does not on v3)
– Redesigned liquidation engine
– soon] chain will…– Antonio | dYdX (@AntonioMJuliano) November 18, 2023
On the other hand, the DYDX token recorded a drop of around 5% during this period, which remains consistent with the trend of the overall cryptocurrency market at the same time despite a slight rise.
