Proposal: Compensate Users Affected in the BTN Liquidity Incident Using DAO Funds

Proposal: Compensate Users Affected in the BTN Liquidity Incident Using DAO Funds

Summary

This proposal seeks approval from the Lenfi DAO to allocate LENFI tokens to compensate users affected by the ADA-BTN liquidity event on May 12, 2024. The removal of BTN liquidity from Spectrum Finance caused mass liquidations on the Lenfi platform. Following an investigation, we calculated a total loss of -310,043 BTN by borrowers. The Butane team committed to providing 155,021 BTN. Additionally, the Lenfi team will provide 105,000 BTN acquired through the Butane private sale and from on-chain liquidations.

We propose to cover the remaining 55,021 BTN from the DAO treasury to make borrowers whole.

Incident

Read more about the incident here: Postmortem Report: BTN Liquidations Incident.

Problem

The incident occurred due to mechanics in Lenfi’s design. Lenfi is able to operate in low-liquidity markets because it uses the Constant Product Formula, which derives asset value based on available liquidity. This incident resulted from liquidity movement, while all operations of the Lenfi protocol remained intact. Additionally, future events could result in similar outcomes.

Proposal

Given the nature of the event, as it happened for the first time, we propose to help Butane and borrowers recoup the losses in full. Additionally, we aim to ensure that future events caused by liquidity movement are not Lenfi DAO’s responsibility.

We propose to choose one of the following options:

  1. Refund 55,021 BTN in LENFI, where BTN price is 1.337 ADA and LENFI is 2.597 ADA (fixing the price at the time of the proposal).
  2. Sell 73,563 ADA worth of LENFI (agreed OTC deal of 2.5 ADA per LENFI) and provide compensation in ADA.
  3. Do not compensate.

Bellow poll will decide whether to move this proposal with all 3 option to on-chain voting.

  • Yes
  • No
  • Abstain
0 voters
15 Likes

This is the right thing to do

9 Likes

I agree, and not just because I was one of the affected

2 Likes