Compound Finance Takes Action

In a move that’s got DeFi enthusiasts buzzing, users of Compound Finance have voted to implement stricter borrowing limits, all thanks to a proposal from financial modeling outfit Gauntlet. Passed on November 28 with a surprisingly sparse turnout of under 7% of circulating COMP tokens, this regulation aims to keep the platform’s users safe from the wild and unpredictable world of cryptocurrency borrowing.

What’s the New Borrowing Cap?

Under the new rules, several popular tokens faced serious reductions in their borrowing limits. For instance, Uniswap (UNI) and COMP saw their caps slashed substantially, from 11.25 million and 150,000 down to a mere 550,000 and 18,000 respectively. It’s safe to say that some wallets are feeling a little lighter today. Other lesser-known tokens also took a hit; for example, Yearn.finance (YFI) experienced a drop from 1,500 to just 20!

Understanding the Rationale Behind the Caps

Gauntlet’s proposal isn’t just regulatory busywork; it’s essential risk management. Their goal is to mitigate several risk factors:

• Insolvency Risk: By limiting how much can be borrowed, the chance of a cascading liquidation—where one liquidation triggers another—is greatly reduced.
• Price Manipulation: The infamous ‘Mango squeeze’ illustrated how easily tokens can be manipulated in illiquid conditions.
• High Utilization Risks: High borrowing limits can put pressure on token liquidity and stability.
• Fear of Shorting: Large short positions relative to circulating supply can lead to major negative impacts, if not managed.

This isn’t Gauntlet’s first rodeo. They previously conducted risk assessments for Aave, prompting a freeze on vulnerable tokens after a high-profile exploit by the Mango Markets hacker, Avraham Eisenberg.

What Happened at Mango Markets?

Let’s roll back the tape to November 22: Eisenberg attempted to exploit Aave by shorting high amounts of Curve (CRV), another token that was feeling the squeeze. This prompted a liquidation that led to unexpected slippage—but you won’t believe this—the slippage was much lower than anticipated. So, instead of sailing off into the sunset with a fortune, Eisenberg reportedly lost around $10 million in the attack! Talk about a plot twist!

What’s Next for Compound Finance?

With a total of $654.7 million in borrowings secured against $2.146 billion in assets, Compound Finance is doubling down to protect its ecosystem. As the impending changes will take effect in just a couple of days, users are urged to rethink their borrowing strategies. It’s time for some disciplined borrowing folks—those caps won’t lift themselves!