Crisis at MakerDAO
Alt coins,  Ethereum

Crisis at MakerDAO as ETH crash creates bad debt worth $4 million

MakerDAO has admitted changes need to be made after a ‘brutal storm of external realities’ led to $4 million of bad debt being created on the DeFi platform

Decentralized finance giant MakerDAO has been holding crisis talks after dramatic falls in the price of Ether left debt worth about $4 million under-collateralized.

At one point, the platform was considering an emergency shutdown as the full impact of “Black Thursday” became clear—with ETH falling by 30% in a 24-hour period.

Loans issued through the Maker Protocol have a 150% collateralization rate, and funds are paid out using the DAI stablecoin, which is pegged to the U.S. dollar. If a consumer locks away 1 ETH in a smart contract (worth $100 in this example), they would be able to borrow 66 DAI, which in theory should be worth about $66.

Problems arose Thursday when sudden drops in ETH prices meant collateral was automatically auctioned to cover outstanding debts. However, Maker Protocol’s infrastructure was simply unable to keep up with ETH’s plummeting value. A “brutal storm of external realities” saw Ethereum’s network suffer a backlog of transactions, increasing the costs associated with making them.  

At one point, those competing in debt auctions to buy the collateral being sold off were able to successfully submit bids of practically nothing in exchange for bundles of ETH—exacerbating the DeFi platform’s debt woes.

Black Thursday Response Thread’

As the scale of the problem emerged, a thread was launched on the MakerDAO forum that asked the community for short-term solutions to mitigate the situation—paving the way for options to be presented to stakeholders in an executive vote.

Announcing the vote on Thursday night, a MakerDAO blog post said: “The current state of the Maker Protocol is healthy. However, while there was no hack, no bug, and no Emergency Shutdown planned, modifications need to be made. Accordingly, the MakerDAO community will hold an executive vote on Friday, March 13, to adjust parameters to help ensure a similar situation doesn’t happen again.”

Some of the proposals being discussed include increasing initial bid prices to stop people being able to bid zero when collateral is being auctioned off, as well as increasing minimum bid times. One particularly drastic suggestion involves ignoring the poll results altogether so “emergency response procedures” can be invoked.

It is hoped that the measures agreed upon will serve as a Band-Aid—reducing the impact in the event that ETH prices fall further. (Overnight Friday they did, briefly hitting lows of about $95 before recovering to three figures once again.) From here, the plan is to “debate further, more refined solutions, in the coming weeks.”

Poll results are not going to be made public until voting is concluded. One thing we do know is that an MKR token auction is in the pipeline—effectively a form of quantitative easing where new tokens will be minted and sold in order to cover the bad debt. This is the first time that such a measure has taken place, and bad news for existing MKR owners as the crypto they own will likely fall victim to inflation. 

If ETH prices resume their downward spiral, retracing to lows considerably below $100, an emergency shutdown could be revisited again.

Modern Consensus has reached out to MakerDAO for comment, but none was forthcoming at the time of writing.

 You May Also Like

Connor Sephton is a journalist with an interest in cryptocurrencies, personal finance, and financial inclusion—as well as the challenges the crypto industry faces in achieving mainstream adoption. He owns cryptocurrencies.