[AIP-14] Close remaining LYF positions on stkBNB-BNB pool to avoid any potential future bad debt

Alpaca Improvement Proposal (AIP) Farming & Lending Pools
1

Background:

With the recent temporary depegging of stkBNB, the liquidity pool on PancakeSwap for stkBNB-BNB has reduced in size to ~$480k USD. Moreover, PCS has removed the $CAKE rewards from the pool, making it highly unlikely for the pool to attract any additional TVL. This kind of low liquidity pool poses a higher risk of liquidation and potential bad debt.

There is currently ~$435k USD farming in LYF through Alpaca Finance on the stkBNB-BNB pool.

Rationale:

By closing out remaining positions, we help secure the platform for both lenders and in-active leveraged yield farmers. If you still have active positions in this pool, we highly recommend that you close them now.

We outline recommend the steps below to close your positions, based on their current debt ratio::

Your position’s debt ratio < 50%

  • Your position already has enough BNB to pay back the loan in your farming assets. You can close your position without incurring any swap fees.
  • We highly recommend that you close your position using the “Minimize Trading” option to avoid any swap.
  • This means you will receive stkBNB back, which you can then turn into BNB, if you wish, through the unstaking process or swapping at a small amount at a time to avoid the large price impact.

Your position’s debt ratio > 50%

  • Your position DOES NOT have enough BNB in the farming assets to pay back the loan. This means if you close your position, a swap is required.
  • If your position size is large, the price impact incurred could be very high. In this scenario, we highly recommend you perform an “Add Collateral” function to bring down your debt ratio to <= 50% before closing your position.
  • When adding collateral, we recommend you add stkBNB and BNB in equal proportion to minimize any swaps required.

Implementation:

We will follow a similar approach to AIP4.2 (https://docs.alpacafinance.org/governance/aip-details/aip-4.2-solution-to-eliminate-bad-debt-risks-from-remaining-waultswap-positions) where we closed out positions on WaultSwap.

Below please find the implementation plan:

  1. We will upgrade the stkBNB-BNB farming contract to allow for a privileged address (i.e., dev controlled address) to liquidate any remaining positions in the vault.
  2. We will change the liquidation method. Instead of swapping non-borrowed tokens in the DEX (this could cause bad debt due to low liquidity), we will use oracle price and let the new liquidation strategy deduct the necessary amount from our wallet as determined by the Oracle with a 5% discount.
  3. Farming positions will now have all base assets and be able to pay back debt and close the positions
  4. Any remaining value after debt repayment is sent back to users

In Step #2, Alpaca Core team will provide the BNB liquidity required to close the positions. We will then unstake the stkBNB to receive back BNB. To eliminate the risks from BNB price fluctuation, the team will have short position to hedge the BNB exposure during the 2-weeks unstaking period. If there is any profit after (in USD terms), we will use them to buyback ALPACA and burn.

Voting

This AIP will be a simple YES or NO vote.

  • A YES vote would close out any remaining positions on the stkBNB-BNB pool.
  • A NO vote would leave the positions opened.
5 Likes
2

This proposal is now live for voting. You have until 11.59PM Saturday Dec31st to vote.

You can cast your vote here: Snapshot