Proposal: Compensation for 3x ETH ILM Liquidation Event

General
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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.

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