Borrowers in DeFi fear few things more than the “flash crash”. These self-perpetuating but often short-lived crashes leave many lenders liquidated, despite only briefly exceeding their liquidation threshold. In addition to damaging the entire crypto market, flash crashes cause borrowers to suffer liquidations and fees which often feel unnecessary. With Deepwaters Vault, some of these liquidations may be avoided.
Deepwaters Vault will offer a “grace period” feature which can be opted into as a means of flash crash protection. When the liquidation threshold is surpassed, users who have opted into the grace period feature will have a brief, predefined period of time to add collateral or for the market to recover before their position is liquidated. If the market does not reverse and/or sufficient collateral is not added during this period, their position is liquidated normally.
As the grace period feature provides additional benefits to borrowers at the expense of some additional risk to liquidity providers, this optional feature will cost borrowers a small increase in their interest rate. Liquidity providers who opt into having their assets used in loans with grace periods can expect improved yield.