Ausd error print recovery for users


It looks like Acala might have been up to no good. There’s some signs of questionable usage of funds from the users that contributed to Build Acala, and the aUSD error print (there’s literally a line in the code about issuing unbacked aUSD) looks like it might have at the very least been negligence on Acala’s part. Giotto’s proposed investigation into the incident will offer answers to those questions. This post however does not address that issue.

Impact of the error print on Polkadot

The reality is the liquidity problems many parachains are having today is the result of that error print. The people trying to repeg aUSD on Kucoin used their funds to buy up the aUSD on there, under the expectation that Acala would cover them, and not get into a legal fight with Kucoin, which even if they were in the right, the opportunity cost would threaten their future viability as a business. They were squabbling over $5 million in the present, while putting at risk billions in five to ten years. There was easily a couple million injected into Kucoin in an attempt to recover it that would have otherwise flown into other parachains.

What can be done?

I think it would be wise for the Dot holders to vote on using the treasury to compensate the holders of aUSD, on Kucoin. Kucoin is covering ~0.045. So, ideally make a full buck with ~0.955 in Dot given per aUSD held. Debating over a haircut would be perfectly acceptable too, as long as holders receive some form of compensation.

Why provide compensation?

If we do not provide compensation Polkadot loses liquidity. It would not surprise me at all if the liquidity problems Parallel is having currently are largely the result of the error print. I know personally if I was compensated I’d use that money to add liquidity to Parallel, and other parachains. So, in fact it’s more of an investment in the ecosystem to increase liquidity for the various parachains. I’m sure others will mostly hold onto the Dot as well. Maybe, sell some to buy other Dot tokens so they can provide liquidity. But, overall it would be beneficial for the health of the ecosystem.

Think of it as a $5 million liquidity injection. A bailout for aUSD holders that would lead to the ecosystem having greater liquidity, and the Dot treasury would be able to collect more from fees over the next couple of years from the increased revenue from all of the transactions it enables.

How to determine who receives compensation

The users on Kucoin could submit their acquirement forms, or other acceptable proof of holdings, which we agree upon here. After submitting that just share their Polkadot address to receive compensation.

Anyone have any thoughts on this?

You can create such a proposal on OpenGov/Polkassembly. However, the probability of this proposal passing is 0% imho.

By the way, Giotto started caring about the alleged scams involving Acala only after realizing it could be a way to discredit The Defi Guy. The Defi Guy is strongly opposed to the Chainalysis proposal.

If you start compensating people who lost money with aUSD, you should also compensate victims of the Nomad bridge bug, which affected Moonbeam users, as well as all future hack victims. Polkadot is not responsible for hacks or bugs on parachains and should not compensate users for losses, in my opinion.

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I agree in general it’s not a good idea to provide bailouts. It should be based on what’s likely to drive revenue for the treasury on a case by case basis, after applying a cost benefit analysis. It’s only $5 million tops, and it’s likely to lead to an increase in the size of the treasury. The treasury would essentially be subsidizing liquidity, which means more fees to collect from improving the efficiency of larger cross chain trades.

The Nomad bridge hack is too expensive and therefore should be denied, or a significant haircut should be given on that, currently. If it does get bailed out fully it should be when the treasury has tens to hundreds of billions of dollars, and can afford the risk of investing in making those users whole. It was $190 million, and bailing them out would bankrupt the treasury.

If it’s a situation where the bug was clearly created for illicit actors to gain funds from the treasury it should be outright denied. That’s why bailouts need to be a case by case basis.

At the end of the day it comes down to whether the treasury profits or not from the bailout. Currently, only a few parachains have the liquidity for large transactions, and even those have slippage. It makes more sense to provide liquidity on the chains with less TVL since the liquidity providers can collect more of the transaction fees than providing liquidity on the already well capitalized chains. Should lead to more fees collected by the treasury from additional cross chain transfers to arbitrage.

It’s ~3% of the total treasury if everyone impacted requests funds covering the losses. Pretty sure, the treasury would make more than that 3% from all of the fees they’ll collect, assuming most of that money goes back into the ecosystem. Someone that’s more familiar with fees collected from transactions would have to do the math to estimate the potential treasury gains.

Before putting this up for a vote on opengov I’d like to have a discussion about the specifics.

That makes sense.
You can also start a discussion on open gov once the specifics have been clarified before creating the actual referendum.

What’s the point of the governance forum when we have a forum on open gov for discussing proposals? Is that for once all of the details have been ironed out on here?

I’m not sure.
If you start creating a proposal on polkassemby it says:

“Discussion posts allows the community to deliberate and recommend improvements. A Discussion should be created before creating a proposal.Create Discussion Post

You can’t even continue the wizzard to create a proposal on polkassembly without referencing a discussion.

Given there are no other participants in this discussion, I’ll add a bit more.

I think Polkadot needed to decide if it is just a provider of blockspace or the center of an ecosystem. The Web3 Foundation gave grants to projects on Polkadot (such as lending platforms), indicating that parachains are more than just customers.

However, there were many alleged scams and rug pulls on DOT. A quick Google search will show an impressive list. For instance, there is Equilibrium, which failed to renew its parachain lease. Any funds still on Equilibrium are stranded there.

In none of these cases did Polkadot compensate the customers or offer any help of any kind. It never openly condemned the alleged scams or took any action to prevent them. Polkadot always completely ignored them.

In my opinion, this is the point where Polkadot decided to be a provider of blockspace and not the central piece of a larger ecosystem.

I believe the question of compensating for losses, condemning, and punishing misbehavior of parachains is coupled with the question of what role Polkadot plays in this ecosystem.

I guess at least when 2.0 goes live those users might be able to get their money out of Equilibrium.

I do believe it’s possible to evolve the governance process to work as litigation / arbitration between parachains and users.

The problem we’re facing is really a lack of liquidity on many chains. There is a large treasury that could be allocated to provide liquidity.

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I see Polkadot as less a blockspace provider, and more a private government. Should implement policies that self regulates their ecosystem.