Alpaca Finance

Background:

With WaultSwap’s migration and tokenomics change that took place in Q3 last year, we have deprecated our LYF integration with the platform and disabled new positions from being opened. Despite warnings and recommendations for users to close their positions, there are still 100+ active LYF positions on WaultSwap.

As liquidity in these LP pools decreases and debt value continues to accrue from borrowing interest, while the positions no longer earns yields, these positions pose higher risk of bad debt.

Several days ago, one such event occurred and incurred ~$24k USDT in bad debt. This happened because the LYF position is large relative to the underlying liquidity in the pool. When liquidation happened, a part of the LP must be swapped back to the borrowed asset (in this case from TUSD → USDT) but because there isn’t much liquidity in the pool, the swap caused a large price impact resulting in a much lower amount of USDT received and bad debt.

Ref to discussion thread: https://forum.alpacafinance.org/t/aip-4-handling-of-a-recent-bad-debt-on-waultswap-s-position-and-solution-to-eliminate-this-risk-in-the-future/264

Proposed Implementation:

We would like to propose two independent votes to handle this issue:

Second Vote: (AIP-4.2)

• Yes or No to close all remaining WaultSwap’s positions and return funds to users to prevent future bad debt cases.

As of March 19th, there are 113 positions with total debt of $140k USD

Below please find the implementation plan:

1. We will upgrade the WaultSwap farming contract to allow for a privileged address (i.e., dev controlled address) to liquidate any WaultSwap’s positions (only for WaultSwap. No change to PCS or MDEX positions.)

2. We will change the liquidation method. Instead of swapping non-borrowed token in the DEX (this is the cause of bad debt due to low liquidity), we will use oracle price and let the new liquidation strategy deduct the necessary amount from our wallet as determined by the Oracle with a 5% discount.

3. Farming positions will now have all base assets and be able to pay back debt and close the positions

4. Any remaining value after debt repayment is sent back to users

In Step #2, Alpaca Core team will provide the liquidity required to close the positions. We will then manually swap them in CEX or other DEX to get back stablecoin. If there is any profit after, we will use them to buyback ALPACA and burn. Note: Some tokens e.g., MATIC no longer has DEX liquidity on BNB Chain and must be traded on CEX.