[GIP-127] Partial Compensation for ezETH Borrowers Liquidated during Emergency Pause

Author: amplice

Summary

Partly compensate users who were liquidated during the ezETH depeg event while the Gearbox Protocol was in an emergency paused state, using the profits earned by the protocol from these liquidations. Full context is available here

Repeating this precedent wouldn’t be smart. Don’t expect this to repeat in the future. Leverage comes with risks, borrowers now have full understanding of the system. DYOR.

Motivation

Recently, the ezETH liquid restaking token suffered a depeg event relative to the price of ETH. In response to this unusual activity, Gearbox's risk management systems automatically triggered an emergency pause of the entire protocol. This was an important precautionary measure in case the price fluctuations were due to a potential smart contract exploit.

However, this emergency pause also had the unintended consequence of preventing some users from being able to add more collateral to their positions and avoid liquidation. While it was technically possible for users to send additional collateral directly to their Credit Account addresses, many were likely unaware of this option.

As a result, some users were liquidated during the pause period who may otherwise have been able to avoid liquidation by increasing their collateral. Gearbox Protocol was still able to handle these liquidations as intended and did not suffer any bad debt, instead realizing a profit.

Liquidation Event Details

The relevant financial details from the ezETH depeg liquidations are as follows:

Interest rate fees collected: 45 ETH Liquidation fees: 90 ETH Liquidation downside: 25 ETH Premium captured by emergency liquidators: 170 ETH

In total, the protocol earned a profit of 235 ETH from this event (170 + 90 - 25). An additional ~2 ETH was earned on Arbitrum.

The 45 ETH from interest collected is not included here as it has no real relation to the liquidations.

Proposal Specification

Use a portion of the profits earned by Gearbox from liquidations during the emergency pause to partially compensate affected users. Based on numbers, see the files in Discord for the precise calculations, such users could expect ~20% of the initial funds to be recouped. The numbers could vary from user to user based on what the price of a liquidation was.

This compensation would be funded by the ~235 ETH profit earned by Gearbox during this ezETH depeg event. Individual reimbursement amounts would be calculated based on on-chain liquidation data. There won’t be any need to claim, it will be multi-sent directly.

Rationale

While the emergency pause functionality worked as intended to protect the protocol, it had the side effect of preventing some users from saving their positions who likely would have otherwise.

It therefore seems appropriate that we use a portion of the profits from these liquidations to compensate them for this. Going further, there are already plans being voted on, as well as upcoming improvements, that you can check in the blog and vote on in the respective proposals. See our blog post here for more information.

Implementation

See below spreadsheet for the compensation amounts.

https://docs.google.com/spreadsheets/d/1KXSnEgi7MM1_t3-fdkZjaUratC7gIk_EL8tXQaSphjY/edit?usp=sharing

Funds will either be sent directly or a claim page will be set up.