A class-action lawsuit has been filed against the Maker Foundation, which supports the ongoing development of MakerDAO, a leading decentralized Ethereum (ETH)-powered lending facility.
The suit alleges that the foundation intentionally misrepresented the risks potential investors in the decentralized finance (DeFi) ecosystem could face. The lawsuit claims that this led to huge losses of collateral on the MakerDAO platform when the crypto market crashed (between March 12 and March 13, 2020).
The complaint has been filed in the Northern District Court of California. Submitted on April 14, 2020, the suit alleges that three entities associated with the Maker Foundation had misrepresented risks involved with investing in the DeFi lending platform. The investors have been referred to as “collateralized debt position holders.”
The complaint notes that collateralized debt position holders allegedly lost $8.325 million, after the Ether (ETH) price crashed on March 12. Maker had been holding Ether as collateral. The cryptocurrency’s value fell dramatically relative to the US dollar-pegged stablecoin Dai in which those loans had been issued.
The risks involved in this type of situation had allegedly not been made clear to the project’s investors. The suit is also critical of Maker Foundation’s use of the term “decentralization.”
“While misrepresenting to CDP Holders the actual risks they faced, the Maker Foundation neglected its responsibilities to its investors by either fostering or, at the very least, allowing the conditions that led to Black Thursday, all after actively soliciting millions of dollars of investment into its ecosystem.”
The complaint is now demanding at least $8.325 million in compensation and an additional $20 million in punitive damages.
The crash in the Ether price (and the larger crypto market on March 12) resulted in a lack of competition, which led to some bidders winning liquidation auctions in exchange for 0 Dai. This made Maker’s debt crisis even worse.