Paper 2023/254
Mitigating Decentralized Finance Liquidations with Reversible Call Options
, Imperial College London, UC Berkeley RDIAbstract
Liquidations in DeFi are both a blessing and a curse — whereas liquidations prevent lenders from capital loss, they simultaneously lead to liquidation spirals and system-wide failures. Since most lending and borrowing protocols assume liquidations are indispensable, there is an increased interest in alternative constructions that prevent immediate systemic-failure under uncertain circumstances. In this work, we introduce reversible call options, a novel financial primitive that enables the seller of a call option to terminate it before maturity. We apply reversible call options to lending in DeFi and devise Miqado, a protocol for lending platforms to replace the liquidation mechanisms. To the best of our knowledge, Miqado is the first protocol that actively mitigates liquidations to reduce the risk of liquidation spirals. Instead of selling collateral, Miqado incentivizes external entities, so-called supporters, to top-up a borrowing position and grant the borrower additional time to rescue the debt. Our simulation shows that Miqado reduces the amount of liquidated collateral by 89.82% in a worst-case scenario.
Metadata
- Available format(s)
-
PDF
- Category
- Applications
- Publication info
- Published elsewhere. Financial Cryptography and Data Security 2023
- Keywords
- DeFiLiquidationReversible call option
- Contact author(s)
- kaihua qin @ imperial ac uk
- History
- 2023-02-27: revised
- 2023-02-22: received
- See all versions
- Short URL
- https://ia.cr/2023/254
- License
-
CC BY
BibTeX
@misc{cryptoeprint:2023/254,
author = {Kaihua Qin and Jens Ernstberger and Liyi Zhou and Philipp Jovanovic and Arthur Gervais},
title = {Mitigating Decentralized Finance Liquidations with Reversible Call Options},
howpublished = {Cryptology ePrint Archive, Paper 2023/254},
year = {2023},
note = {\url{https://eprint.iacr.org/2023/254}},
url = {https://eprint.iacr.org/2023/254}
}
