The Venus Protocol community has greenlit the first steps of a BUSD deprecation plan. This plan encompasses an audacious “Forced Liquidation” mechanism targeting the BUSD market, aiming to reclaim outstanding borrowed BUSD by liquidating accounts holding these positions. It’s a tectonic shift, a veritable dismantling of a once-prominent market, and here’s how it’s happening.
First, a quick step back. Venus Protocol is a decentralised finance (DeFi) platform that enables users to earn interest on their cryptocurrencies by supplying them to a pool from which others can borrow. The “Forced Liquidation” mechanism comes in the wake of a series of actions to scale down the BUSD market. The initial stage had already ceased new supply and borrowing activities by setting the relevant caps to zero and upping the BUSD Reserve Factor to a staggering 100%. It also halted minting and borrowing functionalities in relation to BUSD, not to mention extinguishing XVS rewards in the BUSD market altogether.
The motivation for this decisive action is rooted in the millions of outstanding borrowed BUSD. Despite the borrow Annual Percentage Yields (APYs) climbing to nearly 100% since late August 2023, users have been startlingly inelastic in their response. Either these positions are inactive, or their holders are seemingly unfazed by skyrocketing costs. In either scenario, this inactivity jeopardises the ability of suppliers to redeem their BUSD, especially with Paxos discontinuing its support for the stablecoin in February 2024.
So, what does the “Forced Liquidation” mechanism actually entail? Unlike regular liquidation scenarios, this measure allows for the liquidation of borrow positions even when a user’s health rate is above the usually protective threshold of 1. It also skips the ‘close factor check,’ thereby enabling a full wipeout of the debt in a single transaction. The exact operational details and the list of eligible liquidators are accessible but not explicitly disclosed in the public announcement.
With community approval in the bag, the plan is to target a VIP—possibly a significant player or a developer in the ecosystem—to carry out these forced liquidations in the second week of October. The precise date remains contingent upon additional development work. In the meantime, Chaos Labs, the team behind Venus Protocol, promises to maintain open communication about the amendments and the list of affected accounts prior to the execution.
So, why should we care? This move has several implications. For starters, it could set a precedent for how DeFi platforms address non-performing assets and inactive or non-responsive users. The financial integrity of the entire Venus Core pool—and by extension, the faith users place in decentralised financial systems—hinges upon effectively managing such issues.
Also, for those involved in the BUSD market, the clock is ticking. This forced liquidation serves as a wake-up call. Users need to be attentive to governance decisions and platform changes or risk losing their positions entirely. It’s a less-than-subtle reminder that while decentralised finance offers numerous opportunities, it also demands a high level of user responsibility.
In a world enamoured by the fluidity and freedom of DeFi platforms, the Venus Protocol’s decision to enforce such a radical mechanism underlines the challenges that come with financial innovations. As we draw closer to the cut-off dates, all eyes will be on how well the community navigates these murky waters. For now, it seems that Venus Protocol is willing to take bold steps to ensure its long-term sustainability, even if it means shaking the very foundations upon which its BUSD market was built.
