This month, wild volatility in the markets, acutely high Ethereum gas prices, and a brief anomaly in MakerDAO’s lending position liquidation processes pushed the leading DeFi dApp into its biggest crisis yet.
How? Namely congestion on Ethereum on “Black Thursday,” March 12th, when the ether (ETH) price tanked by some 50 percent intraday largely thanks to the COVID-19 coronavirus officially being declared a global pandemic by the World Health Organization (WHO).
The panic in the markets on that Thursday led to many people selling off their ETH in exchange for cash or stablecoins, with the rapid price turn then putting more than a few MakerDAO lending positions underwater collateral-wise.
Amid these circumstances, an unknown bidder was able to buy up around $4.5 million worth of underwater ETH collateral essentially for free when the Maker system was expecting some 4.5 million Dai — the dollar-pegged stablecoin of the Maker project — in return.
Auctions Proved Successful
The protocol debt that resulted from that brief period of anomalous Black Thursday activity needed to be righted within Maker’s system, so emergency auctions of newly minted MKR — the governance token of the MakerDAO community — were set up to cover the shortfall.
These auctions were big milestones all things considered, since the MKR token is designed under normal conditions to be deflationary, i.e. the MKR token is supposed to have hard cap supply of 1,000,000 tokens.
With that said, the MakerDAO whitepaper calls for the minting and auctioning of new MKR in emergency situations wherein the lending dApp needs to be recollateralized, which is precisely what happened after Black Thursday.
As such, the MakerDAO project minted more than 20,000 new MKR and hosted an auction to sell those tokens off in bunches on March 19th. The move was an unprecedented one, as the Maker community has never had to mint new MKR before, but the auctions ultimately proved successful as just over one week later those 20,000 MKR had been sold off for a trove of over 5.3 million Dai — a reality that ensures the dApp is now shorn of Black its Thursday protocol debt.
So concludes MakerDAO’s first major crisis, but the fallout isn’t over yet even though the immediate wildfires have been put out, so to speak. That’s because some users had their lending positions 100% liquidated on that fateful Thursday when their liquidation penalties should have actually only been 13%.
That unfortunate sequence of events means some users are still waiting for answers from the community, particularly in the form of potential compensation. How the Maker community ends up finally responding to these pleas for compensation is a key thread to watch going forward.
Naturally, MakerDAO’s key figures were focused on righting the protocol debt first and foremost. Now that the MKR auctions have concluded successfully, the users who experienced blown Maker lending positions on Black Thursday can now surely receive more attention toward their grievances, whatever ends up happening going forward.
A Line in the Sand?
MakerDAO just endured its most challenging month to date, but things most certainly could have been worse. A catastrophic hack could have occurred, for example. Alas, the emergency auctions have concluded and the MakerDAO system is returning to baseline accordingly.
However, the road ahead isn’t necessarily clear. Of course, none of MakerDAO’s key stakeholders are expecting a similar emergency in the future, but then again no one was expecting the exact trajectory of Black Thursday’s events, either.
With that said, some have called into question whether MakerDAO can sustain another similar episode without bigger consequences ensuing for the DeFi arena in general. That’s up for debate, but it’s definitely a debate worth having with the early stakes being as high as they are.
Another @MakerDAO CDP incident cannot ever happen again if DeFi will ever be a thing. This was a failure.
— Peter / ‘pet3rpan’ (@pet3rpan_) March 30, 2020