MakerDAO debt auction
Cryptocurrencies,  Ethereum,  Technology

MakerDAO debt auction achieves its goal, late bidders reap reward

Bad debt worth millions of dollars has been covered through the debt auction, but compensating people wiped out by 0 dai bids is still being debated

MakerDAO has nearly wrapped up its first-ever debt auction—an event designed to cover millions of dollars in bad debt triggered by the ether flash crash on March 12.

According to Dune Analytics, it appears that the auction has helped MakerDAO to achieve its objective. Over 4.3 million DAI stablecoins have been raised to cover the bad debt across a total of 86 auctions. However, because it was formatted as a reverse auction in which all bids were a fixed 50,000 DAI, participants “bid” by lowering the number of MKR tokens they would accept.

MakerDao’s DAI is a stablecoin, which seeks to maintain a price of $1 (it’s currently $1.02). Its sister token, MKR, is a governance token. It provides voting power in the Maker decentralized autonomous organization. It also collects transaction fees and acts as insurance, as MKR tokens are mined automatically when price of ether used as collateral for MakerDAO loans drops rapidly

A bid of 50,000 DAI is worth roughly $50,000. MKR was worth $282.79 at the time of writing—meaning that a lot of 250 tokens would be worth $70,697.50 at current rates.

On average, MKR tokens were auctioned off at a rate of $246.05—about 13% less than the current market rate.

The late bird gets the worm

It also seems that those who participated in the debt auction early got a bad deal compared with those who waited to take part later. The winner of the first lot walked away with just 173 MKR—meaning they’re out of pocket to the tune of more than $20,000 at current prices. Dune’s figures show that most people in the first 40 lots ended up getting about 190 MKR in exchange for their 50,000 DAI. With a current value of $53,730, they are taking a small profit.

But look at what’s happened in the later lots. Most bidders have managed to walk away with about 227 MKR in exchange for their 50,000 DAI. At the current market rate on March 24, this means that they’re sitting on a potential profit of about $14,000. Not bad for a day’s work.

MKR tokens are being newly minted following the outcome of the auction, and some critics argue that this will have an inflationary effect on its price going forward. Others insist that the debt auction represents a sweet deal for those who have submitted successful bids, given how a single MKR was worth $500 just two weeks ago.

Questions remain

Unanswered questions include whether MakerDAO will compensate holders whose ETH collateral was liquidated at 0 dai—wiping them out completely. MakerDAO governance is currently holding a vote on whether to compensate them, and if so, how much. While the details are vague—the choices are an undefined no, low, medium, or high compensation—the votes (as of press time) are strongly in favor of repaying at least some of the approximately $1 million to $3 million lost. 

Another issue  is what to do about the 20 auctions blocked by a technical glitch, worth about 1 million dai. Proposals to adjust the dai stability fee, set one for the newly adopted USD Coin collateral, and lower the debt ceiling are also the subject of governance polls.

What happened at MakerDAO?

As reported by Modern Consensus earlier this month, MakerDAO was plunged into crisis on Black Thursday—March 12—when the price of Ether suddenly crashed.

ETH fell by about 30% in a 24-hour period, meaning that ether being held as collateral for crypto loans was automatically liquidated and auctioned off. Delays in the network, and flaws in the auction process, meant that some were able to buy bundles of ETH with a bid of zero DAI—effectively free money.

Although an emergency shutdown was averted, crisis talks quickly began in the MakerDAO community. A raft of measures were voted on and unveiled, with USDC being added as a third option for collateral alongside ETH and the Basic Attention Token (BAT). Some critics pointed out that the use of USDC undermined one of DAI’s main selling points: that it was completely decentralized.

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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.