A Liquidation Strategy That Profited $1 Million During the Creation of Aave's $1.6 Million Bad Debt.
@avi_eisen has got arrested. Audiences are still occupied by his attack on #AAVE that left $1.6M in bad debt. Yet few had noticed a Liquidation Strategy That Profited $1 Million when the $1.6M debt was created.
TL;DR: In brief, the liquidator (etherscan.io/address/0xc37704a457b1ee87eb657cae584a34961e86acac) liquidated a total of 9 million CRV and profited about $1 M. Most of the profit came from his exposed CRV position being in the same direction as the CRV price change.eigenphi.substack.com/p/a-liquidation-strategy-that-profited
There were 4 stages of the liquidator's actions.
1οΈβ£ Nov 19, when the CRV price was low, the user increased his CRV position.
2οΈβ£ After the CRV price increased, he used these CRV to liquidate 2 million CRV debts on AAVE, earning at least $459K in revenue.
Position chartπ
3οΈβ£ The liquidator started shorting CRV by depositing USDC and other tokens to AAVE and borrowing CRV to liquidate @avi_eisen.
4οΈβ£ He repaid the CRVβs debt and closed the short position.
His strategy during the third and fourth phases profited about $613K.
This graph shows that the liquidator has an accurate view of the CRV market move. Besides, he can proficiently change his position by seeking liquidation opportunities in the fluctuation of CRV price to maximize profit.
Why does this strategyβs profitability stand out? The revenues and risks brought by DEXs within the market microstructure can be reduced, and the profits and risks are placed in the price fluctuations of CRV in the longer term, as shown in this example.
WARNING: INCOMING OF MATH EQUATIONS!
We are taking a closer look at the contribution of each liquidation to the overall debt as the CRV price changes on November 22.
Specifically, for the liquidator 0xc377, here is the graph of the bad debt factor for each liquidation. Since the liquidators liquidate at a relatively high CRV price, this liquidator contributed an estimated 492793.6 CRV of bad debt based on the model.
For lending protocols like @AaveAave, how to attract liquidators or even use their own funds to liquidate in time is a topic worth discussing. But at the same time, building a model to minimize the impact on borrowers is a tradeoff worth considering.
For a more detailed analysis, please visit eigenphi.substack.com/p/a-liquidation-strategy-that-profited