Bankless - Yaron Velner - CEO of B.Protocol
Primer: In this episode of Bankless in Mar 2021, David Hoffman interviewed Yaron Velner, CEO of B.Protocol, as he talked about how the protocol can optimise the liquidation process in MakerDAO and Compound, making it more efficient and reducing MEV. He also shared about the incentives for liquidators and the users, so read on to find out more.
How did B.Protocol get started?
Background
Black Thursday happened in Mar 2020 when the market absorbed the covid pandemic impact, resulting in a rapid drop in ETH prices
This caused a bunch of on-chain liquidations
In MakerDAO, there are some vaults that were liquidated for the value of zero dollars, with ETH as the collateral
Due to on-chain congestion and the high gas fees, no one was bidding for the value of the collateral
Someone bid for zero dollars and that bid was accepted since no one else was bidding for it. This is according to the MakerDAO protocol and not a hack
If they had been using B.Protocol, they would have been liquidated at market price
About Yaron
Yaron is the ex-CTO of Kyber Network since 2017
One of the co-designers of WBTC protocol
Yaron was in the liquidation space since Dec 2019
He already saw that the liquidation process in DeFi is sub-optimal
Had been discussing what will happen in a big liquidation event
Initially, he thought that MakerDAO will have some contingency plan for such events, but it turns out that they don't have any
Black Thursday thus becomes one of the main reasons to start B.Protocol
B.Protocol v1
What is B.Protocol?
B.Protocol democratizes the liquidation systems in DeFi to unlock better capital efficiency, through a Backstop liquidity protocol.
Aims to make lending platforms like MakerDAO and Compound more capital efficient and stable by incentivizing simple users and professional traders to act as liquidators
If you're a MakerDAO or Compound user, you can continue using them via B.Protocol interface with the exact same conditions and rules
In return,
B.Protocol will get priority in liquidating the users under the same conditions
Users get to share some of the liquidation proceeds
The longer-term goal is to be a backstop to take care of DeFi liquidations, to create better capital efficiency, and to reduce miner extracted profits (MEV)
For users of B.Protocol
The main concern of the user of lending/borrowing platforms is to be liquidated at zero dollars
The other concern is that the lending/borrowing protocols become vertically insolvent due to improper liquidation, rendering it bankrupt because no one is able to withdraw their collateral
The whole point of lending platforms is to allow people to leverage their funds to achieve better capital efficiency
If the liquidation procedure is sub-optimal, this leads to users getting a very poor leverage ratio
In TradFi, you can leverage to x100 but in MakerDAO or Compound, you can only go x3 or x4
E.g. MakerDAO has a 150% collateralization requirement, so to borrow $1 of DAI, you need to put in $1.50 worth of collateral
The $0.50 is the buffer that MakerDAO secures for DAI but this is capital inefficient
This buffer exists because MakerDAO does not have a good liquidation process i.e. there is no assurance that undercollateralized loans will be liquidated
B.protocol can offer better assurance of a good liquidation procedure and hence the buffer need not have to be so large
This can also lead to a higher leverage ratio
Even if users do not need this much leverage, having a higher ratio will make them less likely to be liquidated, so it is good for everyone
For liquidators
Liquidators, also known as keepers, help to liquidate undercollateralized loans
Liquidators fight gas wars in order to get top priority for the liquidation
In the end, the miners are the ones that get a huge chunk of the profit from liquidations
Users of B.Protocol allow the protocol to get first priority in liquidation so there is no bidding war
The savings that the liquidators have, this MEV, will go into a jar and users of the protocol get a proportionate share of the jar based on their user score
How does B.Protocol v1 work?
For users
Users can continue using MakerDAO or Compound through B.Protocol. There is no difference in the terms and conditions, and they get the same interest
B.Protocol has no custody over the assets deposited
Users will get extra yield in addition to the usual interest rate because the savings from eliminating gas wars between liquidators will be channelled to a jar and proportionally given back to the users
There is also assurance that there will be proper liquidation and there will not be instances where their loans are liquidated at zero dollars
Importing from MakerDAO or Compound can be done with 1 click and does not require any unwinding of the user’s debt
Illustration of how B.Protocol gets priority in liquidations
A user borrows from Compound via B.Protocol
When the user is nearing liquidation price, B.Protocol pays off the debt to Compound on behalf of the user, thus providing a cushion to the user account
From now onwards, it will be B.Protocol that will initiate the liquidation process and not Compound anymore
Thus B.Protocol gets first priority to the liquidations
Basically, a user will give B.Protocol permission to manage the debt e.g. repay part of the debt
Sharing of jar
User scores
B.Protocol users get a user score and this is based on how much is borrowed or lent
There is a Cscore for Compound users and Mscore for MakerDAO users
User scores are like yield farming, except that it is not a token and is non-transferrable
The score will determine the proportion of the jar that a user is entitled to get
It can also be used for voting in the governance of B.Protocol
Examples of governance voting:
Deciding on the distribution of the jar i.e. how much liquidators and users get
Incentivising new users
Contribution to the jar
DeFi liquidators usually get 5-8% for liquidations because of fierce bidding wars between them
Professional liquidators can settle for lower premium of 1-2% if they can get a commitment and assurance from B.Protocol that they will have priority and can skip all the gas wars
This uncertainty plus costs is something that is not present in centralised platforms like Kraken and FTX
This difference will go to the jar
MakerDAO or Compound do not care if miners take all the profits, hence the value proposition of B.Protocol is that they can make the whole process a lot more efficient and share this liquidation premium
The smaller the liquidation premium, the higher the volume of liquidations so things will still work out well
Future roadmap
💡 Take note that this interview is in Mar 2021 and some of this information is either outdated or had been realised.
Aave coming soon
In the future, there will be a standard abstracted layer that will allow integration with all lending platforms (already started with B.Protocol v2 that was launched in August 2021)
Governance of the protocol will start around the end of April 2021
The long term goal is to become the backstop primitive that is missing in DeFi Lego
Optimising liquidation procedures allows a higher leverage ratio that can be used in lending/borrowing platforms
This could allow integration of DeFi into centralised financial institutions like Coinbase or Gemini because of stronger assurance of liquidations
This will be a win-win for everyone
Since this interview was published, the B.Protocol community has voted to tokenize the governance of the protocol. Today the protocol is governed by BPRO token holders. You can read more about it here - https://docs.bprotocol.org/info/governance
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