Forum Link: https://forum.inverse.finance/t/firm-liquidation-coverage-validation-proposal/601/1

Summary

The Risk Working Group (RWG) requests 5,000 DOLA to create and monitor liquidatable test positions across sensitive FiRM markets to empirically validate liquidation coverage. This proposal represents the evolution of our liquidation research from the grant-based approach to data-driven validation, establishing the foundation for future liquidation infrastructure development.

Background

The Liquidator Grant Program launched on October 4, 2024, with the objective of incentivizing liquidators to monitor exotic collateral types that traditional MEV bots might not immediately pick up. Almost 11 months later, the program received 11 submissions from unique addresses, resulting in 2 confirmed payouts totaling 500 DOLA, with 4,500 DOLA remaining unused from the original budget.

The program’s primary goal was to demonstrate strategic value by ensuring liquidation coverage for previously unmonitored markets, for example st-yCRV which had never experienced MEV liquidator activity prior to the grant program. Since launch, 36% of all FiRM liquidations (9 out of 25) occurred in grant-eligible markets across 6 different market types, validating the need for targeted attention to exotic collaterals.

Recent internal discussions have raised questions about whether liquidation coverage gaps actually exist across FiRM’s current market ecosystem. Evidence suggests sophisticated liquidation bots are already operating effectively, with multiple different bots utilizing advanced techniques including flash minting and cross-protocol arbitrage strategies. This empirical evidence challenges the assumption that exotic markets lack adequate liquidation coverage.

Vision

The RWG envisions a three-phase evolution of FiRM’s liquidation infrastructure:

Phase 1 (Past): Liquidator Grant Program - Targeting perceived gaps in exotic market coverage and providing targeted incentives, establishing proof of concept for liquidation ecosystem development.

Phase 2 (Present): Empirical Validation - Deploy controlled test positions to objectively measure liquidation response times and coverage across sensitive markets, providing data-driven insights to inform future infrastructure decisions.

Phase 3 (Future): Comprehensive Infrastructure - One possible future iteration is to develop in-house liquidation bot as protocol backstops, publish open-source reference implementations with technical documentation, and establish gamified community incentives to foster competitive liquidation environments aligned with industry standards.

Our ongoing study into liquidators is meant to positions FiRM alongside leading protocols like Aave, Morpho, Compound, and Maker, which have all invested in comprehensive liquidation infrastructure as foundational protocol safeguards rather than optional enhancements.

Present Ask

The RWG requests 5,000 DOLA to create liquidatable positions at 100% borrow limits across sensitive FiRM markets, including:

LP Collateral Markets: Uncommon collateral types in DeFi that require distinct liquidation strategies

CRV Derivative Markets: Including cvxCRV and st-yCRV, which have historically been susceptible to significant price swings

Pendle Principal Token Markets: Current and future PT collateral markets that represent novel, although widely adopted, DeFi primitives

Future Exotic Collaterals: As new markets are deployed, particularly those involving niche DeFi derivatives

These positions will be monitored to measure liquidation response times, identify coverage gaps, and validate assumptions about current liquidation infrastructure effectiveness. The data collected will inform decisions about whether additional liquidation infrastructure development is necessary or if current organic coverage is sufficient.

This approach addresses the empirical validation requested by the Product Working Group while maintaining the RWG’s commitment to proactive risk management across FiRM’s expanding collateral universe. The controlled testing environment ensures that liquidation discovery occurs during stable market conditions rather than during actual stress events when rapid response is critical.

On-Chain Actions

Grant the RWG multisig an allowance refresh of 5,000 DOLA for liquidation testing purposes