As part of our efforts to increase transparency around DeFi borrowing and lending protocols, we’ve just launched a new dashboard that tracks bad debt (i.e. insolvent accounts) across Compound compatible protocols. You can find the dashboard here.
How it Works
The bad debt dashboard periodically scans all user debt and collateral, and whenever user debt > user collateral, it is added to the total bad debt of the platform. To make the system more lightweight, we scan the full user list once a week, and scan the active list of users every hour.
The USD value of the collateral and debt is not taken from the lending platform price feed (and during the development stage we found a buggy price feed in one of the platforms). Instead we use Krystal’s new price feed API which quotes real time market prices and the Zapper API that gives prices for more complex assets.
The bad debt dashboard is fully open source, and currently covers 8 lending platforms on different chains. We welcome PRs to support more protocols. The backend repository is available here and the front end repository is here.
What’s an Insolvent Account?
In Compound, and other similar protocols, an insolvent account is one whose borrowed balance exceeds its total collateral amount (in dollar terms).
Usually when an account exceeds the collateral amount it is liquidated by a third party (e.g. a bot) for an incentive and the user forfeits their collateral to make the debt whole. However, when an account is not liquidated on time, the liquidated collateral might not be enough to cover the position’s debt, and it adds to the amount of bad debt within the protocol — which can pose a risk to users.
Risks to Users
There is no way to force users with bad debt to return their loan. The reason that a large amount of bad debt poses a risk to users is straightforward: as bad debt builds up, more users will be unable to withdraw their funds. And due to the design of Compound and similar protocols, the last to withdraw from the protocol will realize the loss.
For example, if a protocol has $70m in bad debt, it means that $70m of the deposited funds are un-withdrawable, and the last user(s) to withdraw will be forced to take on the $70m loss.
We hope that this dashboard helps better visualize the risks associated with various protocols across the DeFi ecosystem!
About Risk DAO
Risk DAO is a service DAO focused on providing a new, open source risk assessment framework and associated audits to DeFi lending and borrowing protocols as well as L1 networks.
You can follow us on Twitter here. You can join our Discord here.
