TLDR: Due to sudden market volatility in the ETH market, a safeguard mechanism in the protocol automatically paused the ETH/USDT PERP market to protect users from further liquidation. The safeguard and the protocol more broadly are operating as intended.
Insurance funds have been increased by over 10X to reduce the risk of a repeat event. A governance proposal has been made to re-enable the market now.
The ETH/USDT Perpetual market was automatically paused as of December 3 at approximately 16:10 GMT due to the liquidation of a large position in recent broad market volatility.
The liquidation was the largest ever in the history of Injective and a protocol-level safeguard was triggered after the insurance fund for the ETH/USDT PERP market was used to cover the liquidation. The protocol fully worked as intended and the pause of the ETH/USDT perpetual market ensured that users would not face further adverse liquidations. All positions have been automatically settled and all resting orders have been cancelled in accordance with the protocol’s procedure for market settlements.
The socialized loss mechanism has operated successfully to protect all positions in the ETH/USDT perpetual market.
While the safeguard mechanism successfully ensured that user funds were protected from further adverse liquidations, it is still a sub-optimal experience for users on Injective to see downtime in the ETH/USDT markets. In order to ensure that this won’t happen again we will be implementing the following items in place:
- The insurance fund stake for all markets have been increased by a factor of 10x. This initiative serves as a critical backstop to mitigate future losses associated with extraordinary volatility events. In addition, as trading volumes increase on the exchange, more funds will be dedicated to the insurance fund in lockstep to ensure healthy leveraged trading.
- Liquidity on the exchange will also increase ten-fold, as more market makers continue to onboard and scale up their operations, thus allowing for more efficient liquidations.
- Liquidation bots are being optimized to be smarter so that they can make markets and increase liquidity when a large position is close to being liquidated. The liquidator bot used by the Injective Labs team will also be open-sourced so that the broader community can participate and improve the mechanism.
Leveraged trading always inherently comes with risk. Today served as an excellent test to the protocol and was an invaluable experience in demonstrating the robustness of the protocol. We are excited for the road ahead and will not stop in our journey to create the most free, fair and efficient decentralized financial system.
Injective is the first cross-chain protocol built for decentralized finance applications. On the Injective exchange, anyone can access, create, and trade unlimited DeFi markets such as futures and perpetuals. Developers can also build cross-chain Ethereum-compatible projects that are lightning fast and achieve instant transaction finality. Injective is backed by a prominent group of stakeholders including Binance, Pantera Capital and Mark Cuban.