MakerDAO (MKR), a leading Ethereum (ETH)-based lending protocol, has released a new report that tries to put the events of “Black Thursday” (when the Bitcoin and larger crypto market crashed over 50% between March 12-13, 2020) into context.
MakerDAO’s report notes that there are certain safeguards or measures that can be taken to ensure or prevent similar events from causing as much financial damage in the future.
Between March 12-13, the Ether price crashed as the world’s second largest digital asset lost around 50% of its value. This dramatic price drop led to the under-collateralization of the debt positions associated with Maker ecosystem’s Dai (DAI) stablecoin.
The report, which was published by “MakerMan,” notes that the historic crash led to liquidations that “swamped” the MakerDAO system’s liquidators.
During the crypto market crash, the Ethereum network experienced significant congestion. As a result, users could not take part in auctions. This reportedly led to a single bidder winning almost 62,843 Ether for 0 DAI across 1,461 different auctions.
The report estimates that the auctions may have led to the Maker lending system becoming undercollateralized by as much as 6.65 million DAI (appr. $6.65 million as DAI maintains about a 1-to-1 peg to the US dollar).
The document pointed out that there were also certain intangible costs.
It noted:
“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 added that when additional keepers took part in bids, the prices offered anywhere between 10% and 14% returns in collateral.
MakerDAO is the leading decentralized finance (DeFi) protocol, which issues the stablecoin DAI.
New DAI is minted each time users enter collateralized debt positions (CDPs), in which collateral (usually Ether, but can also be Basic Attention Token or USDC stablecoin) is deposited into an Ethereum-based smart contract. Each time this happens, a portion or percentage of the locked digital assets’ value is represented by new DAI.
The collateral may be used to stabilize the value of DAI. The decentralized lending system aims to incentive the creation or removal of Dai from the MakerDAO ecosystem.
Loans that can’t be backed up by their collateral go into liquidation. During this process, the outstanding loan’s collateral is auctioned off, in exchange for the Dai stablecoin.
MakerDAO has tried to address the recent crisis that occurred on Black Thursday by entering several new debt auctions, where newly minted MKR tokens are sold, in exchange for DAI, in an attempt to inject capital back into the system.
More than 5 million DAI were secured during the auctions. Paradigm Capital reportedly won 68% of the auctioned MKR tokens.
To prevent the same damaging effects from taking place again (following the market crash on March 12), MakerDAO’s governance processes are now able to immediately suspend the auction system and associated liquidations, in order to prevent users from securing collateralized debt positions by putting up 0 DAI.
The report suggests adding safeguards to restart auctions if they have fewer than three active bids and two unique bidders. This effectively places a limit of 50 ETH batches for each auction lot. It also recommends creating a Maker liquidation dashboard.
