Risk Working Group Liquidator Grant Program
Problem Summary
As a stablecoin lender, we’re looking to onboard more exotic collateral types into FiRM which may not be closely monitored by traditional MEV (Miner Extractable Value) bots or liquidators. Exotic collateral types may include illiquid tokens, niche DeFi derivatives, or real-world assets (RWAs) that don’t have high trading volumes or clear liquidation routes. This creates challenges in ensuring timely liquidation in case their value drops, since we can’t assume traditional liquidators integrate or monitor these assets by default.
Our objective with this incentivization program is twofold:
- Attract liquidators to integrate with these exotic collateral markets and ensure their involvement in monitoring and liquidating them.
- Establish a direct line of communication with liquidators, allowing us to maintain engagement, offer support, and ensure liquidators stay updated on new collaterals, liquidity changes, and protocol updates.
Strategic Benefits of Communication and Incentivization Program
- Creating a Feedback Loop for Market Health
- By maintaining an active communication channel with liquidators, we can quickly gather feedback on whether exotic collaterals are too volatile, illiquid, or difficult to manage, helping us make timely parameter adjustments to these markets. Liquidators can flag problem assets or suggest which collaterals to prioritize or avoid based on market conditions.
- This feedback loop will also enable liquidators to suggest improvements to the liquidation process or suggest technical innovations, like automated liquidation strategies that could further secure the health of FiRM.
- Strengthening Liquidator Loyalty
- Building this liquidator “community” not only helps promote liquidation efficiency but also creates a decentralized group of participants who have a vested interest in our platform’s long-term success.
- Proactive Risk Mitigation for Illiquid Markets
- Exotic collaterals come with their own risks, especially around market manipulation and liquidity constraints. By incentivizing liquidators to monitor these markets closely, we reduce the likelihood of sudden liquidity crises or price collapses going unnoticed. This makes FiRM more resilient and reduces the overall risk profile of the debt backing.
Phase 1: Manual Verification & Rollout of the Program
Simple Liquidator Reward Process via Website UI
- Manual Submission of Liquidation Proof:
- Liquidators will manually submit proof of their successful liquidation through our website’s UI. This proof could include transaction hashes, wallet addresses, and collateral details.
- The UI should allow liquidators to upload these details easily and guide them through the process.
- The website should display a clear process for how long verification will take (e.g., 24-48 hours) and when they can expect rewards to be credited.
- Verification by Our Team:
- Our team will verify the liquidation by checking the submitted on-chain data and ensuring that the liquidation meets the program’s criteria (e.g., collateral type, amount liquidated, etc.)
- Our team will have to verify that liquidators haven’t gamed the program. Any liquidation performed on a spoof position will be exempt. This will be determined at the discretion of the team.
- Reward Distribution:
- Once verified, the liquidator will have the reward sent directly to their wallet, and this transfer can be tracked on-chain for transparency.
- Documentation & Guidelines:
- Provide clear documentation for liquidators explaining the eligibility criteria, required proof, and step-by-step instructions for claiming rewards.
Build a Direct Communication Line with Liquidators
- As liquidators begin using our manual system, we can start building a communication channel (e.g., a Telegram or Discord DM) where they can:
- Ask questions or provide feedback about the liquidation process.
- Receive updates on new collaterals being supported or market conditions that may require more frequent liquidations.
- Suggest improvements or tools that would help streamline liquidations.
- This communication line is critical for future automation, as it will help us understand liquidator needs and potential friction points in the current process.
Incentive Program Structure
- Program Reward
Liquidators will receive DBR tokens for their first unique liquidation in an eligible market, up to $250. Exotic or harder-to-monitor collaterals will offer higher rewards (up to $500), encouraging liquidators to prioritize these assets. The RWG will maintain an open dashboard of eligible markets and the first 3 liquidators of a market will be rewarded. The RWG also reserves the right to veto suspicious submissions.
- Potential Benefits of Using DBR in this Program
By using DBR, liquidators are directly rewarded with tokens that reflect their contribution to the platform’s stability. Since DBR is tied to our debt-backing mechanism, it creates a natural alignment between liquidators and the health of FiRM.
- Incentivize Exotic Collaterals with Higher Rewards
For collaterals that are less liquid or more difficult to monitor, offer higher rewards (e.g., $300-500 for exotic asset liquidations), up to the discretion of the RWG. This encourages liquidators to focus on more challenging assets, ensuring that even these are covered in case of a sudden price drop.
- Bonus for First-Time Market Liquidations:
To quickly attract participants into a new market, we could consider additional incentives to first-time market liquidations, up to the discretion of the RWG.
Program KPIs and Objectives
Past data (see here: FiRM Liquidator Address Analysis Report) reveals 43 unique addresses have performed liquidations on FiRM, with the top 5 most frequent addresses accounting for 54% of all liquidations, and top 10 accounting for 71%. With this data in mind, this program aims to onboard a minimum of 20 unique liquidators, increasing our unique liquidators by at least ~50%.
On Chain Actions
- Grant the RWG Multisig an allowance of xxx DBR (equivalent to $5000 at current DBR prices) to pilot the liquidator grant program.