Alpaca Finance mulls over how to handle bad debt from temporary stkBNB depeg

The decentralized autonomous organization (DAO) of Alpaca Finance, a leveraged yield farming product and lending protocol, is currently brainstorming on the best line of action following a recent bad debt caused by stkBNB's depeg.

As a backstory, there was a security breach on Ankr BNB (aBNBc) on December 2, leading to a temporary depeg of stkBNB. The malicious actor was able to drain and sell stkBNB in other pools. Although Alpaca Guard managed to save a significant percentage of positions from liquidations, the damage had already been done due to the duration of the depeg. Notably, some LYF positions on the stkBNB-BNB pairs were liquidated.

The protocol was left with a bad debt of 1,587.87 BNB after the incident, representing approximately 0.2% of its lending TVL at the time of the event.

To remedy the situation, the DAO is looking to activate its Insurance Plan to cover the bad debt. If approved, 50% of the protocol revenue currently channeled to governance will be redirected to pay off the bad debt. Meanwhile, the locked ALPCA in governance will remain untouched, with the remaining 50% of protocol revenue paid out to governance during this phase.

At current market prices, it will take about five months to repay the bad debt.

“While it’s easier in the short-term to want to not cover the rare case of bad debt like this, the Alpaca Insurance Plan is what gives lenders and users of our platform confidence to use it,” the proposal said.

As expected, the proposal has generated mixed reactions in the forum. One user suggested equally splitting the bad debt between the insurance plan and lenders.

I was wondering whether there’s an option where 50% of the bad debt is absorbed by insurance and 50% is absorbed by lenders so that they get part of the money back…that should mitigate.

Responding to the comment, another user opined that the move could have “a negative long-term impact if the protocol doesn’t cover lenders as it should.”

The project’s Head of Strategy & Marketing, Samsara Notallama, maintained more of a neutral stance. According to him, Alpaca Finance was not under any obligation to refund lenders since the incident was caused by “events on a sequence of external protocols (ankr exploit → stkbnb wombat pool)” and the Oracle Guard worked as intended. However, the community should be left to decide what to do.

So it should go to a vote and xALPACA holders will decide whether to cover the bad debt to lending or not.

Update: The proposal to activate Alpaca Finance's Insurance Plan was passed on Thursday morning. Consequently, 50% of protocol revenue will go into paying the bad debt.

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