KeeperDAO: Harnessing Cooperation to Increase the Profitability of Liquidation Pools
With the rise of open finance, new profit-making opportunities have spawned on the sidelines of the game without dominating headlines. Entities that process loan liquidations and sell loan collateral acquired at a discount in the open market net a profit through arbitrage. In order to build on this opportunity in a way that benefits all participants, Talo Systems and Amber Group have united to launch a liquidation pool governed by the KeeperDAO.
Competing with Gas and Equalizing Profit
Processing liquidations on protocols like Maker, Compound, and dYdX create near risk-free opportunities for entities with large enough capital pools to take advantage of these circumstances. Individual liquidators usually lose out due to their diminished financial ability relative to larger players, and the introduction of an open, accessible liquidity pool that processes these liquidation opportunities brings this opportunity to the table for smaller fish.
KeeperDAO, while primarily focusing on performing liquidations, will park their liquidity pool in a lending pool on Compound or dYdX to earn investors a yield when there are no liquidations to process rather than allowing the funds to sit idle. You might be thinking that this will lead to everyone flooding to larger pools, but KeeperDAO envisions a different future.
Priority Gas Auctions (PGAs) are the result of various arbitrageurs using second-order thinking to front-run each other’s gas fee in order to be the one that processes the liquidation. Keeper theorizes that if all pools coalesce and act as one entity, they can increase their net profit by keeping gas costs minimal, rather than overpaying drastically on gas fees to get their liquidating transaction confirmed.
Merits and Drawbacks
Other than providing opportunities to individual investors rather than just Whales, an argument in favor of such a DAO comes from the ability to implement decentralized governance while increasing profitability for other players. Protocols that don’t have liquidations at the moment, such as Synthetix, could benefit from the existence of these pools as it provides them with a new profit-making opportunity whilst giving the Synthetix protocol liquidators right off the bat.
Drawbacks include the use of “grim triggering”, a game-theoretical strategy where if a person defects from the pool, they are no longer allowed to rejoin. After a few weeks or months of KeeperDAO running, somebody analysing their transactions will be able to see their usual gas costs and front-run it to process the liquidation first. If truly profitable, we can expect more such pools to emerge, and as the grim triggering doesn’t allow people who leave to come back, Keeper will lose investors to these other pools, and these investors can’t ever return to Keeper.
This, in effect, brings back the free market gas auctions that we see in open finance today.