The Loop: Liquidations’ Loop for ICHI
What happened? ICHI pool plunged 90% in its pool over Fuse.
What's ICHI? ICHI is a community-owned infrastructure to allow protocols to mint oneToken stablecoins backed by USD Coin ($USDC).
How? If the liquidity deposited by lenders, isn't enough to cover the demand of borrowers, liquidity dries.
Since this generally happens if you don't have the risks measurements you need to have, borrowers, ask for overcollateralized loans so they can't pay their debt.
The Pool 1-3-6
The Pool 136 a.k.a. ICHI pool got greedy and set a collateral factor of 85%.
How they could do that and why no one told something? Because they were Fuse's pools.
Fuse is a lending and borrowing protocol where people can create their lending and borrowing pool customizing everything.
What this means is that people can borrow assets up to 85% of their collateralized assets.
You got the amount to want to borrow, your collateral, and the collateral factor:
If for example, you ask for 100 $ICHI tokens with an 85% collateral factor, you will borrow 85 $ICHI tokens equal to 85% of your total loan.
To put things in perspective 85% is extremely high. A 65%-70% would be much better.
Even so, if you set a collateral factor of 85%, you at least can reduce the risks of early liquidations setting:
A capped amount to borrow, something that for example Aave does.
Make sure you have enough liquidity stored in your treasury.
Higher fees.
Higher interest rates.
But no.
So what happened? A liquidation cascade= Greedy borrowers + unlimited loan + ridiculous collateral factors + no risks measurements.
Fuse began to liquidate positions to cover the debt of the already liquidated ones.
This thing is kind of funny: As borrowers asked for more loans, Fuse began to liquidate loans and as borrowers asked for even more loans, more loans were liquidated.
Who is to blame? ICHI's team.
But also, maybe Fuse could have set a kill switch.
A kill-switch mechanism would have halted all operations on the pool.
But of course, something like a kill switch could increase Fuse's fault on this or in any other liquidation cascade.
Why you wouldn't take risk measurements? I don't know man. Even if make your borrowers overcollateralized, you know dudes are greedy and they will start taking loans like crazy absorbing liquidity.
Would you call ICHI a Ponzi? Yeah, even if they didn't want to be. This isn't the first time a cascade of liquidations on a lending protocol (that by the way, it can be customized) happens so people already know what are the risks of over-collateralization.