In the world of cryptocurrency, decentralized finance (DeFi) protocols are developing rapidly. However, the risks and challenges that come with it cannot be ignored. Recently, the Venus protocol faced a large-scale liquidation event of more than $200 million due to price manipulation involving its native token XVS, which has attracted widespread attention. This article will delve into the background, causes and impact of this incident.
Introduction to Venus Protocol
Venus Protocol is a decentralized financial lending platform based on Binance Smart Chain that allows users to borrow funds using XVS tokens as collateral. According to the provisions of the Venus Agreement, the value of borrowed funds must always be lower than the value of the collateral provided. This is an important mechanism to protect the interests of both borrowers and lenders.
What happened during the liquidation: On Wednesday, the price of the Venus protocol’s XVS token suddenly surged at midnight Eastern Time, instantly climbing from $76 to $144, an increase of nearly 90%. This price movement has allowed many users to borrow larger amounts or other cryptocurrencies such as Bitcoin and Ethereum with relatively few tokens as collateral.
However, the subsequent violent price correction in the cryptocurrency market left many users with insufficient collateral value to cover their borrowings. Despite this, many borrowing users did not repay their loans promptly and chose to keep their newly acquired tokens, ultimately leading to the Venus Protocol liquidating the remaining collateral.
consequences of liquidation
In this liquidation, due to the downturn in the overall cryptocurrency market, the value of many collaterals dropped significantly, and even after the Venus Protocol sold the collateral, its value was still far lower than the value of the original loan. As a result, Venus Protocol incurred more than $95 million in bad debt, including:
2,000 Bitcoins (worth nearly $79 million at current prices)
5,700 Ethereum (worth nearly $17 million at current prices)
This means that Venus Protocol cannot collect receivables from users, causing huge financial pressure.
Reasons why XVS price surges
So, what exactly causes the violent fluctuations in XVS prices? Joselito Lizarondo, the founder of the Venus protocol, pointed out that there are two main reasons:
A large number of market orders appear in a short period of time: this causes prices to rise rapidly.
Limited token supply: Many users choose to stake XVS tokens, resulting in a reduction in the number of tokens circulating in the market.
The majority of XVS token trading occurs on the Binance exchange, and according to Igor Igamberdiev, an analyst at The Block Research, XVS’s relatively low liquidity makes its price vulnerable to manipulation. While the price of XVS tokens skyrocketed, the Venus protocol still approved more loans, which undoubtedly exacerbated the risks.
Founder's response
Despite the huge liquidation caused by the incident, Lizarondo said that the Venus protocol is still operating normally and "no funds were lost." He acknowledged that there is a problem with bad debt, noting that Venus Protocol will bridge the gap through its grant program and “leveraging the XVS token.”
History of similar events: In fact, in the cryptocurrency market, bad debts due to liquidation like the Venus protocol are not uncommon. For example, in November 2020, the price of the stablecoin DAI skyrocketed, resulting in liquidation funds of up to $88 million in the DeFi protocol Compound. On "Black Thursday" on March 12, 2020, the collapse of the cryptocurrency market also caused the liquidation value of the DeFi protocol MakerDAO to exceed $8 million.
in conclusion
The liquidation event of the Venus protocol is undoubtedly the largest in the history of DeFi. It not only reflects the volatility of the cryptocurrency market, but also reminds investors to carefully assess risks when conducting lending operations. With the continued development of DeFi, how to effectively manage risks and protect user funds will become an important issue in future protocol design.
In this rapidly changing market, investors should remain vigilant and pay attention to market trends at all times in order to make informed decisions.