Terra Powered by Luna Expresses: Harpoon Protocol is a user-executed liquidation platform for liquidating under-collateralized positions on Anchor’s money market via the Anchor Liquidation Contract. To better understand Harpoon, we first need to outline the basic mechanism of liquidations on Anchor.
Anchor needs to prevent borrowers from defaulting on their loans issued in UST (collateralized in bLUNA) to avoid systemic solvency risks. Using an incentive design that facilitates the liquidation of at-risk bLUNA collateral, Anchor can properly calibrate solvency risk.
At-risk collateral = collateral with Loan-to-Value (LTV) ratio exceeding a maximum threshold, currently 50%. Liquidations of bLUNA collateral are induced by downward price conditions in the underlying collateral (LUNA), reducing the borrowing capacity of outstanding loans.
At-risk collateral on the Liquidation Contract is either fully liquidated or partially liquidated by a third party such as a user-deployed bot, where the underlying collateral is converted to Terra stablecoins that are used to repay the loan.
The execution of liquidations is performed via a bidding framework where bidders submit bids to the contract, taking into account the CW-20 asset, size, and premium rate — a rate of premium the bidder is willing to pay for the at-risk collateral that is capped at 30%.
More succinctly, bidders profit from executing liquidations by purchasing the at-risk collateral at a discount to the current Oracle price via a competitive market of other bidders.
Executing bids is a zero-sum game between competing entities interacting with the liquidation contract. Naturally, liquidation bots that automatically parse at-risk positions and rapidly submit, retract, and execute bids based on variable market conditions currently dominate.
But that’s where Harpoon enters the equation. With Harpoon’s V1, users can bid on at-risk collateral liquidations manually. Via a user-friendly interface, users configure and submit their bids via a dashboard presenting available liquidation opportunities.
It’s yet to be revealed whether or not user-executed liquidations can keep pace with a competitive market of liquidation bots interacting with the liquidation contract. But Harpoon’s future prospects may help allay those concerns.
For example, V2 will come with an integrated analytics dashboard that showcases data about outstanding loans, collateral, and ongoing liquidations — — the latter important for remaining competitive with bots.
According to Harpoon, V3 will include: “V3 will be a smart contract that is driven by an intelligent back-end, enabling liquidation/execution decisions based on market conditions on the underlying asset (bLUNA, bETH, bSOL, etc.) and activity in the liquidation contract.”
The end-user can deposit various assets into the contract and the contract will take care of the rest. V3 will be a fully automated liquidation engine that will pay the participants after each successful liquidation in their (supported) asset of choice.
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