Proposal: Compensation for 3x ETH ILM Liquidation Event

General
1

I. Summary

On February 2, 2025, the 3x ETH ILM experienced a rapid partial liquidation due to extreme market volatility and high DEX slippage, causing additional losses beyond normal 3x leverage drawdowns. This proposal requests:

  1. Compensation for Losses of the partial liquidation event.
  • Cover liquidation-related losses using either Seamless Protocol revenue or esSEAM tokens, pegged at a fair reference price of SEAM at the time of “The Event”.
  • Compensation distributed pro-rata to affected users based on each address’s percentage of liquidation-specific losses.
  1. NFT for Affected Users
  • Issue a commemorative NFT (“Resilience Badge”) to all addresses that incurred losses, which may unlock future benefits.
  1. Enhanced Transparency & UI Upgrades
  • Display on each user’s dashboard the total amount lost to partial liquidations since the user’s inception in the ILM.
  • Provide ongoing transparency about major ILM events and protocol performance.

By supporting this proposal, the DAO upholds Seamless Protocol’s commitment to user trust, fosters goodwill, and ensures accountability for the ILM’s performance under extreme market conditions. It is also important to note that this was a rare/unique scenario which the team has learned from and no solution can be perfect, however the need for compensation still stands.

II. Background & Context

On 2/2/2025, ETH prices plunged roughly 30% in under 5 minutes—an extreme move that triggered a partial liquidation in the 3x ETH ILM. High slippage prevented the ILM from rebalancing properly, causing a protective liquidation meant to avoid bad debt. As a result:

  • ILM participants naturally faced ~60% (3x) losses from the ETH price drop.
  • An additional amount in protocol-level liquidation losses were incurred, hitting around 701 users. While smaller accounts lost $85 on average, the top 10 depositors bore the majority of the impact (averaging $5.2k each). There are users who have also borne losses at the mid level.

Although the ILM has since resumed normal operations, the event underscores the need for compensation (because it was effectively a protocol-level fault) and improved transparency.

III. Problem Statement

  1. Additional Liquidation Losses
  • Users were subject to more loss than the standard 3x leverage drawdown due to the ILM’s inability to rebalance in time.
  1. User Trust & Goodwill
  • Many users relied on the ILM to mitigate liquidation risk, and the partial liquidation undermined that confidence.
  1. Transparency Gaps
  • Current UI does not provide a clear, at-a-glance history of liquidation events or the total monetary impact on user positions.
  1. Governance & Accountability
  • The DAO must decide if, how, and when to compensate users for protocol-specific failures.

IV. Proposed Solutions

A. Compensation for Impacted Users

Mechanics:

  • Funding Source:
    • Option 1: DAO revenue (reserves or an equivalent treasury allocation).
    • Option 2: esSEAM tokens, valued at the SEAM price on a specific snapshot date.
    • Hybrid Model: Some combination of ETH(if feasible) plus an esSEAM allocation.
    • Consideration has to be made for the fact that users wont have liquid and therefore the if the compensation is in esSEAM then it has to be a percentage over the actual loss.
  • Distribution Approach:
    1. Identify Affected Addresses: Use on-chain data (via Dune dashboard or blockscout link) to confirm which addresses incurred partial liquidation losses on 2/2/2025.
    2. Pro Rata Allocation: Each address receives a share of the total compensation pool proportional to its liquidation-specific loss percentage.
  • Vesting (for esSEAM):
    • A recommended 6 month vesting schedule to ensure long-term alignment with the protocol, reduce dumping risk, and preserve treasury resources.

B. NFT “Resilience Badge” for Affected Users

  • Purpose: Recognize and reward early supporters who faced an unexpected protocol event.
  • Utility: While initially symbolic, the NFT could unlock future perks or governance influence (e.g., whitelists for ILM v2.0, bonus yields, or special access to new features).
  • Issuance: Mint an NFT to each wallet that held 3x ETH ILM tokens during the liquidation block range.

C. Dashboard Transparency & ILM Event Logging

  • Display Historical Liquidation Info:
    • On each user’s ILM dashboard, show the total amount lost to partial (or full) liquidations since the user’s deposit inception.
    • Provide a historical graph or event log of ILM rebalances and liquidation events.
  • Ongoing Reporting:
    • Seamless could publish monthly or quarterly performance reports summarizing ILM operations, rebalances, and any partial liquidations.
    • Encourage a robust data feed from the Dune dashboard or official analytics so users can easily track real-time positions.

These transparency measures ensure that if a future liquidation event occurs, users can quickly understand the impact and see how the ILM responded.

V. Proposed Implementation Plan

  1. Distribution Method:
  • If using esSEAM, the DAO would create a vesting contract, with each user receiving tokens gradually over 6–12 months.
  1. NFT Mint & Delivery:
  • Develop and deploy an NFT contract.
  • Mint “Resilience Badge” NFTs to each impacted address.
  1. Dashboard Enhancements:
  • Incorporate a “Loss History” panel on the ILM dashboard showing each user’s aggregated liquidation losses.
  • Publish a post on the Seamless documentation site explaining how to interpret liquidation data and steps the team is taking to improve ILM resilience.
  1. Communications:
  • Announce the finalized compensation details.
  • Provide a timeline for distribution, vesting, and NFT airdrops as applicable.

VI. Conclusion

The partial liquidation event on 2/2/2025 highlighted a critical edge-case lapse for the 3x ETH ILM. This proposal aims to restore user trust by compensating additional liquidation losses, rewarding loyalty through an NFT, and enabling better transparency so users can make informed decisions going forward. By approving this proposal, the DAO ensures the Seamless Protocol stands by its product, supports users who believed in the ILM, and fortifies the foundation for ILM v2.0 and future growth.

We encourage all community members to discuss, provide feedback, and vote on this proposal. Together, we can uphold our commitment to innovation, accountability, and user protection within the Seamless ecosystem.

4 Likes
2

This is a well written proposal and as an investor in the 3x Ethereum protocol, I feel it necessary to compensate for the protocol’s inability to act as it was designed to act. It was unfortunate that the market reacted so quickly, but nevertheless we do feel that it did not perfect as we were advised that it should perform.
I am perfectly agreeable to compensation via the esSEAM token and I am encouraged that we are working to improve Ilm’s functionality to assure that it can work as we would expect. We all look forward to the growth of Seamless, the Base ecosystem and Ethereum protocol.

3

Thanks for making this proposal @eg0maniac !

Here is my thoughts:

  1. Funding Source/Distribution Method: Would agree esSEAM as the means of compensation to recoup user losses from the partial liquidation. esSEAM always vests on a 12 month schedule… so accordingly would say esSEAM to cover losses with a 12 month vesting schedule.

  2. NFT Mint & Delivery: Not sure this is essential but rather a nice to have, unsure on scope and what this NFT would facilitate in the future. My additional concern would be that NFT design and distribution takes time thus will postpone compensation process.

  3. Dashboard enhancements: This sounds great! Think this would be very helpful information to show. Without blocking distribution of rewards in terms of when this could be built and coded — perhaps if we can get Seamless Eng to at least verbally commit/acknowledge this request and prioritize to incorporate into the UI to give users more clarity on rebalance/liquidation events. Given their backlog/what they are working on this could be a good middle ground?

  4. Communications: +1. I think that communications are very important here. Piggy backing on the original Seamless comms in Discord, and then sharing out this proposal to the community once there is alignment towards next steps with timeline for distribution of rewards.

To conclude, I would opt for esSEAM compensation option since this would be the fastest and easiest way for both the DAO and affected users

1 Like
4

Items to consider

  1. Distribution of the NFTs is pretty straight forward at it is snapshot related. This marks users for any future benefits like possible premium access to features. Or partnership related perks. These users were the ones that took the leap of faith in the vision of the ILM.

  2. esSeam vested over 12 months should be at an evaluation above the amount lost as that amount was liquid and is no longer available to the user unless $eth is injected into the pool.

  3. Dashboard metrics are critical. Many users do not completely understand the 3x ILM and how decay works. For instance, the impact of staying in the 3x ILM if there is heavy volatility(>15%) and its impact on the capital. The current pricing of the token on a users dashboard is irrelevant compared to monitoring the users actual position. Again this should be shown from the inception of the users entry into the ILM. Preferably marking the entries and the exits, with amounts.

5

Appreciate your proposal @eg0maniac! And thanks too to @Ras. I’d say we’re closing in on a path to resolution for the partial liquidation for the ETH 3x ILM.

Some thoughts to add in based on the thread thus far:

Regarding the NFT, this isn’t something Seamless has done so it could be viewed as a one-off and distraction. Would propose making users whole and additionally noting the list of wallets impacted for a possible future distribution of rewards at a later point i.e. airdrop or some token distribution tied to an upcoming product launch.

For the esSEAM vesting itself, agree on the 12 month vesting schedule so that nothing custom would need to be written. Would propose covering all losses and possibly a slight delta % on top, perhaps 105% of the total amount as a sign of good faith (~$62K in esSEAM), to cover losses to users impacted.

For Dashboard Metrics, I think this definitely needs to be prioritized and agree here. Would seek commitment from Seamless and Eng resources to prioritize metrics pertaining to rebalance events and liquidations. For specific speccing, perhaps tapping community members directly i.e. Eg0maniac/Ras/Cryptofried for feedback during the build to arrive at metrics that help provide clarity on these events.

As a next step, would look to move the summarized proposal and path to compensation to a Snapshot vote to get buy in from the broader community.

1 Like
6

Thanks for taking lead on this @eg0maniac !

And appreciate the thoughtful responses as well so far from folks like @Ras @Cryptofried @lewis

Given the typical ~5 day discussion period has passed, I would suggest we try to move towards a finalized resolution and perhaps a re-posting/re-editing/re-summarization of the proposal in thread for a final look?

Then I would say perhaps someone like ego or ras posts a snapshot for signalling from the community of agreement. If that passes through, some core contributors can dedicate time to run the proper dune queries/analysis to generate a csv that reflects impacted users + amounts (since we know the total impacted amount right now, this detailed step perhaps is not key to arriving at community consensus).

Curious what others think?

Some reactions to the topics discussed above, from my perspective:

  1. As far as esSEAM vs custom - I would certainly also align with utilizing esSEAM to preserve precious community eng contributor bandwidth as ILM v2.0s are nearing a head.

  2. For the UI/FE updates I think this is great feedback and should be heavily considered for the ILM v2.0 rollout coming soon, and if it cannot be rolled out at launch can be prioritized based on community feedback as a follow-on?

  3. Lastly, on compensation, I lean toward a 1:1 ratio (100%), as my current view is that the DAO serves as a safety module, not a full backstop. HOWEVER, it seems a broader discussion may be needed on whether it should act as a 100% safety net or not - this has not been explicitly discussed by the DAO before. This topic does have some complexities to consider, such as misaligned incentives or encouraging future risky behavior. That said, I understand the case for slightly higher compensation given the illiquidity of esSEAM. In the future, clearer expectations—such as 1:1 compensation in esSEAM if a safety module is established—would be beneficial. (BTW for transparency, I am one of the wallets affected by the partial liquidation.)

2 Likes
7

According to the rules, the updated proposal should be reposted by the author. So @eg0maniac could u please add the feedback to your original one so that we could start a 2 days cool down period and then pass it to the vote (I will handle the last part since Im a delegate and have enough voting power).

I believe the key components are:

  1. Compensation in esSEAM, 105% as an extraordinary measure (we should be clear that it is just a one time solution, not a precedent)
  2. The DAO agrees to incorporate ILM related dashboard into Seamless V2.
8

The Draft of the proposal as per the requested changes.

I. Summary

On February 2, 2025, the 3x ETH ILM experienced a rapid partial liquidation due to extreme market volatility and high DEX slippage, causing additional losses beyond normal 3x leverage drawdowns. This proposal requests:

  1. Compensation for Losses of the partial liquidation event:
  • Cover liquidation-related losses using esSEAM tokens, pegged at a fair reference price of SEAM at the time of “The Event.”
  • Compensation distributed pro-rata to all affected users—small, mid-level, and top depositors—based on each address’s percentage of liquidation-specific losses.
  • Amount set at 105% of the actual liquidation loss if compensated in esSEAM to reflect its vesting and reduced liquidity.
  1. Enhanced Transparency & UI Upgrades
  • Display on each user’s dashboard the total amount lost to partial liquidations since the user’s inception in the ILM.
  • Provide ongoing transparency about major ILM events and performance (with an improved dashboard in ILM v2).

By supporting this proposal, the DAO upholds Seamless Protocol’s commitment to user trust, fosters goodwill, and ensures accountability for the ILM’s performance under extreme market conditions. It is also important to note that this compensation is a one-off event and does not create a binding precedent. The scenario was extraordinarily rare, but due to the protocol-level fault, compensation is warranted to maintain user confidence.

II. Background & Context

On 2/2/2025, ETH prices plunged roughly 30% in under 5 minutes—an extreme move that triggered a partial liquidation in the 3x ETH ILM. High slippage prevented the ILM from rebalancing properly, causing a protective liquidation meant to avoid bad debt. As a result:

  • ILM participants faced ~60% (3x) losses from the ETH price drop.
  • Additional protocol-level liquidation losses affected around 701 users. Smaller accounts lost $85 on average, top 10 depositors bore $5.2k each, and mid-level users also incurred substantial drawdowns.
  • Although the ILM resumed normal operations, the event underscores the need for compensation (due to a protocol-level flaw) and improved transparency.

III. Problem Statement

  1. Additional Liquidation Losses:
    Users suffered more than the standard 3x drawdown due to the ILM’s inability to rebalance in time.
  2. User Trust & Goodwill:
    Many users relied on the ILM to mitigate liquidation risk; the partial liquidation undermined that confidence.
  3. Transparency Gaps:
    Current UI does not provide a clear record of liquidation events or the total monetary impact on user positions.
  4. Governance & Accountability:
    The DAO must decide if, how, and when to compensate users for protocol-specific failures.

IV. Proposed Solutions

A. Compensation for Impacted Users

Mechanics:

  • Funding Source:

    1. Option 1: DAO revenue (reserves or an equivalent treasury allocation).
    2. Option 2: esSEAM tokens, valued at a snapshot date (e.g., 24-hour TWAP around 2/2/2025).

  • Distribution Approach:

    • Identify Affected Addresses: Use on-chain data to confirm addresses incurring partial liquidation losses on 2/2/2025.
    • Pro Rata Allocation: Each address, including mid-level depositors, receives compensation proportional to its share of the liquidation-specific losses.

  • 105% Coverage Using esSEAM:

    • Because esSEAM is not fully liquid and will be subject to vesting, the final compensation amount in esSEAM should be 105% of the user’s nominal loss to account for this illiquidity.

  • Vesting (for esSEAM):

    • A recommended 6-month vesting schedule to ensure long-term alignment, discourage dumping, and preserve treasury resources.

B. Dashboard Transparency & ILM Event Logging

  • Display Historical Liquidation Info:
    On each user’s ILM dashboard, show the total lost to partial/full liquidations since inception.
  • Ongoing Reporting:
    Seamless could publish monthly/quarterly reports summarizing ILM operations and partial liquidations.
  • ILM v2 Dashboard:
    A dedicated, enhanced dashboard in the next version of the ILM to keep users fully informed about rebalances, liquidations, and performance in real-time.

V. Proposed Implementation Plan

  1. Distribution Method:
  • If using esSEAM, create a vesting contract (6–12 months).
  • The final rate is 105% of each user’s liquidation-specific losses if esSEAM is chosen.
  1. Dashboard Enhancements:
  • Add a “Loss History” panel to show aggregated liquidation losses.
  • Publish documentation explaining liquidation data and ILM resilience improvements.
  • This can be encorporated in ILM V2.
  1. Communications:
  • Announce finalized compensation details and timeline for distribution, vesting, and NFT airdrops.
  • Emphasize that this compensation is a one-off event, not a precedent for all future scenarios.

VI. Conclusion

The partial liquidation event on 2/2/2025 highlighted a critical edge-case lapse for the 3x ETH ILM. While no system can be perfect, we propose one-off compensation at 105% for those impacted if esSEAM is used, ensuring user trust and accountability. This proposal also includes an NFT for those affected and a push for better transparency—especially in ILM v2. By approving this proposal, the DAO demonstrates Seamless Protocol’s commitment to supporting users who believed in the ILM, thus reinforcing the foundation for future growth.

3 Likes
9

+1 for full transparency - it is crucial that the UI clearly shows both the amount of loss incurred and the corresponding date of each liquidation event.
This will not only help users track their historical performance more effectively but also provide immediate insight into the timing of significant events like the February 2, 2025 partial liquidation.

10

The Draft of the proposal as per the requested changes. Removed NFT suggestion and fixed vesting to 12 months.

I. Summary

On February 2, 2025, the 3x ETH ILM experienced a rapid partial liquidation due to extreme market volatility and high DEX slippage, causing additional losses beyond normal 3x leverage drawdowns. This proposal requests:

  1. Compensation for Losses of the partial liquidation event:
  • Cover liquidation-related losses using esSEAM tokens, pegged at a fair reference price of SEAM at the time of “The Event.”
  • Compensation distributed pro-rata to all affected users—small, mid-level, and top depositors—based on each address’s percentage of liquidation-specific losses.
  • Amount set at 105% of the actual liquidation loss if compensated in esSEAM to reflect its vesting and reduced liquidity.
  1. Enhanced Transparency & UI Upgrades
  • Display on each user’s dashboard the total amount lost to partial liquidations since the user’s inception in the ILM.
  • Provide ongoing transparency about major ILM events and performance (with an improved dashboard in ILM v2).

By supporting this proposal, the DAO upholds Seamless Protocol’s commitment to user trust, fosters goodwill, and ensures accountability for the ILM’s performance under extreme market conditions. It is also important to note that this compensation is a one-off event and does not create a binding precedent. The scenario was extraordinarily rare, but due to the protocol-level fault, compensation is warranted to maintain user confidence.

II. Background & Context

On 2/2/2025, ETH prices plunged roughly 30% in under 5 minutes—an extreme move that triggered a partial liquidation in the 3x ETH ILM. High slippage prevented the ILM from rebalancing properly, causing a protective liquidation meant to avoid bad debt. As a result:

  • ILM participants faced ~60% (3x) losses from the ETH price drop.
  • Additional protocol-level liquidation losses affected around 701 users. Smaller accounts lost $85 on average, top 10 depositors bore $5.2k each, and mid-level users also incurred substantial drawdowns.
  • Although the ILM resumed normal operations, the event underscores the need for compensation (due to a protocol-level flaw) and improved transparency.

III. Problem Statement

  1. Additional Liquidation Losses:
    Users suffered more than the standard 3x drawdown due to the ILM’s inability to rebalance in time.
  2. User Trust & Goodwill:
    Many users relied on the ILM to mitigate liquidation risk; the partial liquidation undermined that confidence.
  3. Transparency Gaps:
    Current UI does not provide a clear record of liquidation events or the total monetary impact on user positions.
  4. Governance & Accountability:
    The DAO must decide if, how, and when to compensate users for protocol-specific failures.

IV. Proposed Solutions

A. Compensation for Impacted Users

Mechanics:

  • Funding Source:
    1. Option 1: DAO revenue (reserves or an equivalent treasury allocation).
    2. Option 2: esSEAM tokens, valued at a snapshot date (e.g., 24-hour TWAP around 2/2/2025).
  • Distribution Approach:
    • Identify Affected Addresses: Use on-chain data to confirm addresses incurring partial liquidation losses on 2/2/2025.
    • Pro Rata Allocation: Each address, including mid-level depositors, receives compensation proportional to its share of the liquidation-specific losses.
  • 105% Coverage Using esSEAM:
    • Because esSEAM is not fully liquid and will be subject to vesting, the final compensation amount in esSEAM should be 105% of the user’s nominal loss to account for this illiquidity.
  • Vesting (for esSEAM):
    • A recommended 12-month vesting schedule to ensure long-term alignment, discourage dumping, and preserve treasury resources.

B. Dashboard Transparency & ILM Event Logging

  • Display Historical Liquidation Info:
    On each user’s ILM dashboard, show the total lost to partial/full liquidations since inception.
  • Ongoing Reporting:
    Seamless could publish monthly/quarterly reports summarizing ILM operations and partial liquidations.
  • ILM v2 Dashboard:
    A dedicated, enhanced dashboard in the next version of the ILM to keep users fully informed about rebalances, liquidations, and performance in real-time.

V. Proposed Implementation Plan

  1. Distribution Method:
  • If using esSEAM, create a vesting contract (12 months).
  • The final rate is 105% of each user’s liquidation-specific losses if esSEAM is chosen.
  1. Dashboard Enhancements:
  • Add a “Loss History” panel to show aggregated liquidation losses.
  • Publish documentation explaining liquidation data and ILM resilience improvements.
  • This can be encorporated in ILM V2.
  1. Communications:
  • Announce finalized compensation details and timeline for distribution, vesting.
  • Emphasize that this compensation is a one-off event, not a precedent for all future scenarios.

VI. Conclusion

The partial liquidation event on 2/2/2025 highlighted a critical edge-case lapse for the 3x ETH ILM. While no system can be perfect, we propose one-off compensation at 105% for those impacted if esSEAM is used, ensuring user trust and accountability. By approving this proposal, the DAO demonstrates Seamless Protocol’s commitment to supporting users who believed in the ILM, thus reinforcing the foundation for future growth.

2 Likes
11

Based on the community proposal, here is a google sheet for transparency’s sake that includes all impacted wallets at the block immediatly prior to the partial liquidation. Google sheet here

This will be utilized in calculating the airdrop and pushing the trxn onchain for governance to vote on and potentially execute.

For audit/comparison purposes, the following Dune Query was used to pull and calculate this information: Dune Query here.

If this is deemed to reflect the community’s proposal above, it will be moved to an onchain proposal within the next few days.

3 Likes
12

Given the long tail of wallets with <$1 in holdings, our suggestion is to only include those with at least 1 esSEAM in balance owed to them as well

2 Likes
13

A governance payload is being prepared and should go live for voting next week. Github PR can be found here

1 Like
14

A user has flagged in Discord that they believe their holdings are not fully accounted for, we are still waiting for more information from the user to validate this claim. I believe the onchain vote for this proposal should be postponed until this can be validated. Discord link for reference

15

This proposal is now live onchain, voting starts in 48 hours. Tally | Seamless Protocol | [SIP-41] Compensation for 3x ETH ILM Liquidation Event

1 Like
16

This proposal is executed on chain:

1 Like