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A small price increase in the DAI stablecoin earlier today led to massive liquidations at decentralized finance (DeFi) protocol Compound.

The protocol witnessed $103 million worth of liquidations, according to tracker LoanScan. Market conditions also led to liquidation at DeFi protocol dYdX, which liquidated about $8 million worth of funds. Together, both the protocols liquidated more than $110 million worth of collateral.

How exactly did DAI’s price increase lead to the liquidations? Compound allows users to borrow funds, including DAI. In all cases, a borrowed amount should always be lower than the collateral provided. In other words, all loans should be over-collateralized.

In today’s case, the liquidations occurred because the DAI price increase led to under-collateralized loans. In other words, the increased DAI price also increased the value of DAI borrowed, as compared to the collateral provided.

To put things in perspective, say, for example, a Compound user initially borrowed 1,000 DAI at $1 DAI, i.e., a total of $1,000. But the DAI price increased to $1.3 during a loan period, so the user’s borrowed amount increased to $1,300. But if the user has less than $1,300 in collateral, Compound would consider this loan as undercollateralized and allow any other user to liquidate it.

The Compound liquidations ended up affecting the so-called yield farmers of its COMP token. One yield farmer, for instance, lost $46 million. 

It is worth noting that such massive liquidations at Compound have occurred for the first time. In previous cases, the highest single-day liquidations at the protocol have been smaller. In July 2020, for example, Compound witnessed $6.3million worth of liquidations, according to LoanScan. As for dYdx, it saw liquidations of about $8.6 million in November 2019, according to the tracker. 

Previously, other DeFi protocols such as MakerDAO and Aave have also witnessed liquidations due to market conditions. MakerDAO, for instance, liquidated $15 million worth of DAI in March during the Black Thursday event, and Aave liquidated $20 million worth of Chainlink (LINK) tokens in August of this year.

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