BUSD Deprecation - Forced Liquidation Mechanism

Summary

A proposal to implement a Forced Liquidation mechanism on the BUSD market. This mechanism aims to liquidate accounts holding BUSD borrow positions, thereby returning BUSD to the Venus Core Pool and allowing users to redeem their supplied BUSD. This initiative is part of an ongoing effort to wind down the BUSD market.

Motivation

The community has approved the initial stage of the BUSD deprecation plan, which involved:

• Freezing new supply and borrow by reducing supply and borrow caps to 0.
• Increasing BUSD Reserve Factor to 100%
• Pause MINT - complementary to setting supply caps to 0
• Pausing BORROW - complementary to setting borrow caps to 0
• Pausing ENTER_MARKET - will not allow users to start using BUSD as collateral. Users who have already enabled BUSD as collateral will not be affected by this update.
• Setting XVS rewards in the BUSD market to 0.

At this time, there are millions of outstanding borrowed BUSD by users that haven’t been repaid despite the borrow APYs surpassing 70% since August 28, 2023, and currently set at nearly 100%. Given that these positions are inelastic to the high APYs and could potentially be inactive, the community can choose to utilize a “Force Liquidation” mechanism. This would facilitate the liquidation of these positions, returning BUSD to the Venus Core pool and allowing suppliers to redeem them prior to Paxos discontinuing its support for BUSD in February 2024.

The full governance discussion can be found here.

Implementation

The “Force Liquidation” mechanism permits the liquidation of borrow positions within a specific market, even when a user’s health rate is above 1. Additionally, it bypasses the close factor check, enabling the liquidation of the entire debt in a single transaction.

1. Implementation details of the forced liquidation mechanism can be found here
2. Additional implementation details regarding eligible liquidators can be found here.

Next Steps:

1. Should the community approve the above, target a VIP to execute the forced liquidations on the second week of October. The exact date for VIP launch is contingent upon additional development and will be communicated to the community at least seven days in advance.
2. Chaos Labs will continue to publicly communicate the planned amendments and list of affected accounts leading to the on-chain execution.