For those who were keeping up on the recent Keeper exploit that unfolded during Maker collateral auctions yesterday, you may have heard that the system currently has roughly $5M in bad debt at the time of writing.
Without going into too much detail, Ether’s massive price drop forced the liquidation of a large number of Vaults, all of which caused the underlying collateral to be put up for auction to reimburse outstanding Dai.
Due to high gas prices, a shortage of Dai and a number of other issues which we explained here, all Keepers became insolvent except for one – allowing him to buy all the liquidated collateral for 0 DAI.
Instead of Vault owners suffering a 13% liquidation penalty, many of them lost 100% of their collateral.
@MakerDAO situation explainer thread ELI10 :
– 4.5M$ underwater due to auction fail
– Surplus Buffer of 500k eaten
Minting MKR is a seriously considered option.
Maker jargon in (), will try to use human words as much as possible
— Marc 'aDai is Money' Zeller (@lemiscate) March 12, 2020
In lieu of this incident, Maker will be minting new MKR tokens which will be sold on the open market to raise funds to cover the bad debt.
An update on recent market activity and next steps:https://t.co/znqYmEY2EN
— Maker (@MakerDAO) March 12, 2020
While many feared that this auction may fail to gain attention due to the significant price drop, prominent members of the DeFi community have bound together to form the Maker Backstop Syndicate – effectively committing to purchase the newly minted MKR on Wednesday.
Dharma similarly plans on participating in the upcoming @MakerDAO backstop auction.
We are forming a group of #DeFi ecosystem stakeholders to ensure that the total shortfall is met, one way or another. We look forward to amplifying our voices in the Maker governance process. https://t.co/oum8sviODt
— Dharma (@Dharma_HQ) March 13, 2020
Lead by Dharma’s COO Brendan Forster, the newly created working doc aims to create a list of participants who pledge to participate in the upcoming auction. As a result, the community can effectively signal that Maker will resolve the outstanding debt in a timely, focused fashion.
“We are proposing establishing a pooled auction contract that would give syndicate participants a way to participate in the auction process should the price of MKR (denominated in Dai) fall to, say, 100 DAI / MKR. Anyone could trigger an auction using pooled funds at the given price once the auctions begin, and all participants in the pool would be able to redeem the tokens they minted by supplying Dai for the equivalent Dai / MKR blend held by the pool.”
As the list of Committed Participants continues to grow, it appears that that auction will run smoothly – effectively allows Maker to cover the bad debt within the same day of the auction’s start.
When asked for comment, Brendan noted:
“Things are evolving rapidly and so certain details might change. What won’t change is that the community is going to make this happen”
What To Expect
Perhaps the more interesting angle of this story is what happens to those who lost their collateral in the process?
Should Maker issue refunds (less liquidation penalties) to those who suffered 100% collateral loss throughout the process?
While the community signal of helping Maker is fantastic, let’s not forget about the Vault owners who suffered serious stress and aggravation as a result of this flash crash.
If one thing is for sure, Maker has always dealt with major issues in a respected manner, and we do not see that changing any time soon.
We’ll keep an eye out on any future upgrades to report back soon!
Cooper is the Editor of DeFi Rate and an active contributor to leading DeFi media outlets like The Defiant, DeFi Pulse, and Bankless. He works with early-stage teams through Fire Eyes DAO to incubate governance models and grassroots community development. He is an ambassador to Set Protocol and an author of a weekly publication called Token Tuesdays. To stay up with Cooper, follow him on Twitter.