[AIP-4.1] Handling of a recent bad debt on WaultSwap’s position

Background:

With WaultSwap’s migration and tokenomics change that took place in Q3 last year, we have deprecated our LYF integration with the platform and disabled new positions from being opened. Despite warnings and recommendations for users to close their positions, there are still 100+ active LYF positions on WaultSwap.

As liquidity in these LP pools decreases and debt value continues to accrue from borrowing interest, while the positions no longer earns yields, these positions pose higher risk of bad debt.

Several days ago, one such event occurred and incurred ~$24k USDT in bad debt. This happened because the LYF position is large relative to the underlying liquidity in the pool. When liquidation happened, a part of the LP must be swapped back to the borrowed asset (in this case from TUSD → USDT) but because there isn’t much liquidity in the pool, the swap caused a large price impact resulting in a much lower amount of USDT received and bad debt.

Ref to discussion thread: https://forum.alpacafinance.org/t/aip-4-handling-of-a-recent-bad-debt-on-waultswap-s-position-and-solution-to-eliminate-this-risk-in-the-future/264

Proposed Implementation:

We would like to propose two independent votes to handle this issue:

First Vote: (AIP-4.1)

Yes or No on the activation of Alpaca Insurance Plan as outlined here: [Security - Alpaca Finance] (https://docs.alpacafinance.org/our-protocol-1/security#alpaca-insurance-plan)

• If activated, 50% of the platform’s earnings would be directed to cover the $24k bad debt (which will be deposited back into the USDT pool.)
• ALPACA governance stakers will still receive ALPACA emission rewards, Grazing Range rewards, and 50% of Protocol Revenue.
• Once the bad debt is covered, 100% of the platform’s revenue will go back to Governance Vault’s stakers as usual.
• Based on the current revenue run rate and structure above, it should take ~2 weeks to cover bad debt.