MakerDao (MKR) has released a new report that attempts to contextualize the ‘Black Thursday’ events and recommends safeguards to ensure that it can never happen again.
A roughly 50 percent crash in Ethereum’s price (ETH) on March 12-13 led to the under-collateralization of debt positions underpinning Maker’s Dai (DAI) stablecoin.
The document, which ‘MakerMan’ authored, said the crash drove liquidations that “effectively swamped” liquidators in the system.
With the congestion-stricken ETH network, users were unable to participate in auctions, resulting in a single bidder winning nearly 62,843 ETH across 1,461 auctions for virtually zero DAI.
In all, the author estimates that the auctions have undercollateralized the Maker system by 6.65 million DAI.
“This event was not only costly to vault holders, but was to the Maker system as well, in capital costs, system confidence and Maker reputation generally.”
The report notes that prices offered between 10 percent and 14 percent collateral returns when additional keepers were able to participate in bids.
MakerDAO Recapitalized Through Debt Auctions
MakerDAO is the DeFi (Decentralized Finance) protocol that creates the DAI for stablecoin.
Dai is created when users assume collateralized debt positions — where collateral (often Ether) is deposited into an Ethereum smart contract, and a portion of the value of the locked assets is represented by newly created DAI.
The collateral is also used to drive Dai’s value stabilization, with the system incentivizing Dai’s creation or destruction depending on whether the price of DAI is above or below $1. Loans that their collateral can no longer support enter liquidation proceedings — where collateral for the loan is auctioned in exchange for Dai.
MakerDAO, in response to the crisis, entered a new series of debt auctions, where new MKR tokens are created and auctioned for DAI to recapitalize the system.
In the auctions, more than 5 million DAI were raised, with the Paradigm Capital venture fund winning 68 per cent of the MKR auctioned
Changes to Prevent Future Failures
Maker’s report identifies several key changes that have been made to the Maker system in order to prevent comparable crises for the protocol in the future.
MakerDAO’s governance now has the ability to “instantly halt the auction system and hence liquidations” to prevent the sale of collateralized debt positions for 0 DAI.