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Saturday, February 4, 2023
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Compound Finance to impose lending caps in light of failed Aave exploit

On Nov. 28, users of decentralized finance, or DeFi, lending platform Compound Finance passed a proposal to impose restrictions on the maximum borrowing of 10 tokens on the protocol. The proposal was put forth by financial modeling firm Gauntlet and passed with a majority “Yes,” although total turnout amounted to less than 7% of the COMP tokens in circulation. 

Most notably, tokens such as Uniswap (UNI) and COMP had their borrow limits slashed from 11,250,000 and 150,000 to 550,000 and 18,000, respectively. Other less liquid altcoins on Compound, such as year.finance (YFI), had its borrow cap reduced from 1,500 to just 20. Coins such as wrapped Bitcoin (WBTC), which previously had no borrow limit on Compound, have been slapped with a ceiling of 1,250 on maximum borrow.

According to Gauntlet, the proposal would prevent “insolvency risk from liquidation cascades,” “price manipulation Mango squeeze exploits,” “risk of high utilization,” and “risk from shorting assets from a short position on Compound of significant size relative to the circulating supply of the asset.” Although the related incident was not directly referenced, Gauntlet also conducted modeling and risk assessment for DeFi lending protocol Aave. 

On Nov. 22, it was uncovered that Mango Markets hacker Avraham Eisenberg attempted to exploit the protocol by shorting high amounts of Curve (CRV), which was an illiquid token on Aave at the time, and forcing the protocol to liquidate the position at a loss due to significant slippage. However, it turned out that the slippage was far less than expected, resulting in an estimated $10 million loss after a CRV short squeeze.

Gauntlet then proposed to freeze a series of tokens on Aave V2 that may be at risk of an exploit due to lack of liquidity. Currently, the Compound Finance protocol has $654.7 million in total borrowings collateralized by $2.146 billion worth of assets.