Can MakerDAO Survive the Coronavirus Pandemic?

Matthew Lam   Mar 13, 2020 12:45 4 Min Read


The coronavirus pandemic and growing macroeconomic uncertainties have seriously dampened the cryptocurrency market, which Bitcoin once dipped below $4000. The “Red Sea” has expanded across the market of decentralized finance (DeFi), where the total value locked (USD) for the DeFi market dropped from $649M to $246M.

Widespread Concerns over MakerDAO community

The share plunge of the cryptocurrency market has severely hit MakerDAO, the leader in the DeFi ecosystem. Maker (MKR) resulted in a massive drop to $246M, compared to $889M a day ago. Such a sharp plunge of Maker’s market value led to widespread concern on the future of Maker. The community-initiated the thread in the MakerDAO forum, in particular, addressing the issue of whether MakerDAO will consider an Emergency Shutdown in the short term.

Per the “Black Thursday Response Thread” initiated by developer “LongForWisdom” on March 13, the community discussed the current actions are taken, the arrangement of regularly scheduled polls and a possible emergency shutdown in the short term. Apart from the forum discussion, Maker has published a blog post regarding the next steps to be taken amid a recent market crash.

Emergency Shutdown is not an Immediate Option

The official blogpost of Maker revealed that there is no planned emergency shutdown, with Ethereum developer Ryan Berckmans concluded a summary of Maker community call stating,

“An emergency shutdown (not happening now) would cause DAI holders to take a haircut, whereas the social contract of MakerDAO is that MKR tokens take a haircut in the event of system failure. Therefore, we should try and ensure that MKR holders take a hair cut by avoiding emergency shutdown if possible. I heard that an emergency shutdown is not being considered as an immediate option.”

Key Changes to be Made

While Maker has no intention to an immediate shutdown, the Foundation agrees that the following issues need to be addressed:

1) DAI is off-peg

The cryptocurrency market has seen a wide “Red Sea”, except for stablecoins such as multi-collateral DAI (MCD). Following the global stock market crash, the price of multi-collateral DAI (MCD) lost the dollar peg and reached USD 1.07. To restore the pegging between MCD and USD, the MakerDAO community is proposing the reduction of DAI Saving Rate (DSR) which brings more DAI in circulation and thus moving the DAI price closer to the $1 peg. Another proposal is the reduction of global stability fee, an attempt to narrow the MCD/USD spread by opening more vaults (formerly known as collateralized debt positions) for arbitrage on the price of DAI.

2) How does MakerDAO settle 4.5M Debt?

With the 30% price drop in Ethereum, some vaults that use Ethereum to mint DAI can dip below the collateralization requirement of 150% and thus undercollateralized. The sharp plunge in the Ethereum price made a lot of vaults available for liquidation. When multiple users liquidated their contracts, this led to the congestion of the Ethereum network and the gas price surged significantly.

During the liquidation process, collateral is auctioned for DAI to repay any outstanding debts. When there is not enough liquidity for keepers to absorb all the liquidations, and one keeper bid $0 ETH with no competition. The lack of competition means bidders can win liquidation auctions without exchange of DAI. As a result, some vaults are liquidated without any DAI circulate back into the system, leading to a 4.5m outstanding under-collateralized debt owed in the MakerDAO system.

To settle the outstanding debts, Maker decided to conduct the first-ever debt auction. According to the official whitepaper, the protocol debt is covered by DAI in the Maker Buffer. The Maker protocol will trigger a debt auction if DAI in Maker Buffer is insufficient to cover the debt. In the debt auction, the system mints MKR token to increase the amount of MKR in circulation, and the minted MKR token will be sold to bidders of DAI.

Results of Executive Voting

The Maker Foundation Interim Governance Facilitator conducted the executive voting on “Adjust Multiple Risk Parameters”. Apart from the risk parameters to restore the peg and debt repayment, the proposal also included the reduction of the debt ceiling and adjustments in Flip and Flop auction. The proposal is passed on March 13 07:14 (UTC). The proposed adjustment of multiple risk parameters will be available for execution on March 14.


Image via Shutterstock

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