The Tally Newsletter, Issue 8

December 1, 2020

We’re back with issue 8 of the Tally Newsletter, a publication focused on all things decentralized governance. We’ll keep you updated on key proposals, procedural changes, newly launched voting systems, shifting power dynamics, and anything else you need to know to be an informed citizen.

This week, we cover:

  • Yearn’s Burgeoning M&A Strategy

  • Compound Mass Liquidation Event

  • Balancer Launches Governance Mining

  • MakerDAO Governance Incentives

In addition to our normal coverage, we’d also like to invite you to sign up as a beta tester for early access Tally’s forthcoming governance dashboard!


Yearn Goes on an “Acquisition” Spree

TL;DR: Yearn has announced partnerships with Pickle, Cream, Cover, Akropolis, and Sushiswap.

In the past week, Yearn Finance has announced no less than 5 partnerships across the defi ecosystem. While they were announced as mergers, none of the transactions represent M&A activity in the traditional sense, as no ownership changes took place. This helped resolve some initial misgivings that YFI holders were not consulted beforehand.

Yearn had previously targeted several of these protocols for yield farming strategies, but these new initiatives represent a first attempt at two sided collaboration. 

The partnerships span a few key areas. First, both Pickle and Akropolis stand to benefit from Yearn devs’ experience with hack resolution gained in the Eminence hack. When the EMN project was hacked back in September, roughly half of the lost funds were sent back by the hacker to the Yearn deployer, allowing the community to return funds to users via a snapshot mechanism. 

Twitter avatar for @bantgbanteg @bantg
Your Eminence, distribution is served. 📟
github.com/banteg/your-em… 🕸youreminence.finance Claims are live. h/t @x48_crypto @BrownieEth @doug_molinam @milkyklim @lbertenasco @lehnberg @fubuloubu and others who helped Image

With Pickle and Akropolis experiencing similar hacks in the past few weeks, Yearn’s expertise in running compensation plans is in demand. The Yearn team has already organized a token distribution of “Cornichon” tokens to those impacted by the Pickle hack, while an Akropolis hack snapshot is planned for the near future. 

Yearn’s revamped fee schedule also creates opportunities for collaboration with other yield aggregators. By writing vault strategies targeting their own projects, they can reclaim the 10% of earnings allocated as a strategist reward, which may otherwise have been dumped on the market. 

Lastly, Andre and the Yearn team have had several projects in development that can now draw on these other projects’ expertise. Some top initiatives include leveraged trading with Cream and Sushiswap, integrating KP3R Network to offer new Sushiswap order types, and adding perpetual insurance to yvaults via Cover protocol.

While these announcements don’t represent true acquisitions, Yearn may still have pulled off a masterstroke if it can acquire the best developer talent from across the ecosystem.

Compound Experiences Mass Liquidation

TL;DR: Market manipulation caused the price of DAI to temporarily spike by 30% on Coinbase, which in turn triggered huge liquidations on Compound.

Compound is often considered the safest of the major defi money market protocols. It has fully decentralized on-chain governance, and adheres to relatively conservative asset and risk policies. While this has served it well over the past two years, the recent move to the open oracle system left it vulnerable to incorrect prices.

Compound’s open price feed uses data from Coinbase to assess collateral levels and trigger liquidation when necessary. This price data is backstopped against Uniswap’s time weighted average price as a sanity check, with a maximum allowed divergence of 20%. 

On Thanksgiving morning, the price of DAI on Coinbase was pushed up to $1.30, triggering a mass of liquidations among Compound DAI borrowers. Many of these users had put on leveraged strategies to farm COMP token rewards, without realizing their positions were at risk of liquidation for DAI price movements. Overall, at least $100 million was liquidated during this drawdown. 

While DAI spiked on Coinbase, it remained relatively stable on other centralized and decentralized trading venues. Unconfirmed reports indicate that the price run may have started on Coinbase due to issues processing deposits and withdrawals. With market makers no longer able to access liquidity on other venues, it was possible to move the price by 30% and trigger the mass of liquidations at a cost of only $22,000. 

Twitter avatar for @mariorzMario Romero Zavala @mariorz
Some quick calculations on the cost of performing the attack: - A total of $381,450 was paid to purchase about 359,692 $DAI, for a total cost of about $21,760. This resulted in over 100M USD of off-price liquidations.
gist.github.com/mariorz/5d3c9f… Image

🤖 Leshner @rleshner

This morning, $DAI prices on Coinbase Pro escalated rapidly, leading to the liquidation (repayment) of 85.2M DAI borrowed from Compound. 124 of 225,793 users were impacted; there are no under-collateralized accounts, and all markets are healthy. https://t.co/p2l3v7fNov

In addition to issues with the oracle system, Compound was potentially more vulnerable to this event due to high leverage on the cDAI market. The market has become a favorite target for yield farmers, who recursively borrow and resupply assets to maximize their COMP reward earnings. With so much leverage centered on a single asset, the community is now considering options to reduce risk concentration such as changing parameters or even disabling COMP rewards for the DAI market.

There is also a separate issue of how to address those who lost funds in the liquidations. While the system technically behaved as designed by using the Coinbase price with Uniswap backstop, in hindsight the oracle mechanism was vulnerable to manipulation. Given Compound’s consistent hands off approach to governance, it will likely fall on independent community members to propose and organize a compensation scheme.

Balancer Launches Governance Mining Program

TL;DR: An active Balancer proposal would redirect a small portion of current liquidity incentives towards voting and participation rewards.

For the past ~6 months, Balancer has been distributing 145,000 BAL per week to liquidity providers. This has helped cement Balancer as a top decentralized exchange, consistently maintaining hundreds of millions in total value locked. But while the trading platform is highly active, Balancer’s governance system is still finding its feet.

To help kick start community participation, Balancer is considering a supplementary incentive program targeted specifically towards governance. The proposal includes a few key components. 

GovFactor would grant a boost to LP earnings for anyone who had participated in a recent BAL snapshot vote, serving as a natural stepping stone for LPs to get involved in governance. The program would also allocate a small portion of BAL rewards to participants in the Balancer forum and discord chat, with distribution managed via a social graphing system (Sourcecred) and native discord tipping. 

MakerDAO Proposes Voting Rewards

TL;DR: The voting rewards proposal would grant continuous payouts of system income to MKR staked in the governance contract.

While the Maker Foundation is slowly backing away from protocol development, the MakerDAO community has continued to ship improvements. In particular, community member “hexonaut” has been hard at work coding up key changes. Following on from his proposal last month for a solution to Maker’s stablecoin collateral (the Peg Stability Module), he’s back with a new proposal to reward governance participation.

The DssGov Rewards proposal would withhold a portion of Maker’s revenue (potentially ~20%) from the current buyback and burn system, and redistribute it to MKR staked in the governance contract. MakerDAO relies on active voters to defend the system against potential governance attacks, and this mechanism could help reduce risk by shifting MKR tokens from defi platforms to the governance contract.

While this proposal was made primarily to address governance safety, it may also help Maker win over skeptical investors who no longer favor buy and burn revenue mechanisms.

On the other hand, staking incentives have sometimes led to increased governance risk and centralization when applied in other systems. In one example, investors seeking an easier way to earn KyberDAO voting rewards have piled into Binance’s KNC staking product, which in turn sharply increased concentration of voting power. With stakers required to vote to claim KyberDAO rewards, Binance has frequently made up over 50% of total voting power and drowned out other voices.

Maker’s proposal doesn’t require active voting to claim rewards, so the immediate risk of exchange dominance is lower. But it remains to be seen if staking rewards help or hinder Maker’s goal of safer governance.


Thanks for reading this week’s issue of the Tally Newsletter! We look forward to having you back next week. And if you’d like early access to Tally’s governance dashboard, don’t forget to sign up as a beta tester!

Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at newsletter@withtally.com

Best,

Nate, Tally