On March 12th, the price of ETH and crypto-assets experienced a significant drawdown in what many of us know as “Black Thursday”.
The drop in asset prices forced mass liquidation events across the DeFi ecosystem as millions in value were liquidated. The sudden increase in transactions naturally created enormous network traffic and congestion. As a result, Maker price oracles failed to update due to unexpectedly high gas prices. The oracle failure ultimately resulted in the loss of collateral for multiple Vault owners.
However, rather than losing a fraction of their collateral minus a 13% liquidation fee, the oracle failure left many Vault owners losing significantly more and in some instances 100% of their debt position – leaving depositors with empty vaults.
One of my friends from high school recently purchased $ETH
Less than two weeks later, he gets liquidated and loses 100% of his collateral 😳 pic.twitter.com/V5Fn9IonJA
— Cooper Turley (@Cooopahtroopa) March 13, 2020
While MakerDAO has been relatively quiet about compensating vault owners from Black Thursday, now that the Maker system has paid off its outstanding debt and the system is fully restored, the DAO has opened up a governance poll to signal whether to move forward with a plan for compensation to victims of the liquidation event.
Multiple Governance Polls have been added.
Voters are now able to signal their support for a:
🔄Vault Compensation – signal whether to move ahead with a plan to provide compensation to vault holders
🏃♂️Add IRV Ranked Choice Voting
More polls below 👇
— Maker (@MakerDAO) April 6, 2020
Compensation from MakerDAO
The governance poll highlights a few key arguments for both sides.
The main argument for compensation is that the Maker protocol performed sub-optimally amid the volatility and the protocol’s users suffered losses. Given MKR holders are effectively earning from vault owners, it is generally in the best interest of MKR holders to ensure user happiness.
Moreover, it looks poor if there’s some asymmetry between risk/rewards for MKR holders versus Vault Owners. In other words – by not compensating victims, it shows that MKR holder receives benefits (MKR burns) while offloading the liabilities and risks of an early ecosystem to its users.
Importantly, the MKR token is designed specifically for these types of situations. All of that in mind, it drives a relatively strong argument for MKR holders to compensate Black Thursday victims in light of the situation.
On the other hand, Vault Owners are expected to understand and accept the liabilities associated with the Maker and Ethereum ecosystems. All of the contract code is open-sourced including the Keeper bot, allowing any user to run the bot in order to liquidate their own collateral at a favorable rate. Despite the Keeper Bot requiring some technical skill, it is reasonable to assume that DeFi users today should understand the risks with our nascent DeFi ecosystem.
While these points may not seem comparable to the argument for compensating victims, the main point of concern for MKR holders is the social contract established by compensating victims. By compensating the vault users now, it sets the standard for future compensation in other similar situations, potentially undermining the system’s mechanism design.
This is the biggest argument for no compensation as the social contract of compensating vault owners may open up new attack vectors and vulnerabilities for the system in the long term.
While the exact amounts in total compensation still need to be calculated along with other details, it is estimated the DAI value of vault holder losses had the protocol operated optimally is less than $4M. Should the vote pass, Vault holder compensation will be paid for via additional flop auctions where once the capital is available, the assets will be put into a contract that vault holders can withdraw from.
Generally speaking, it’s good to see MakerDAO taking compensation into consideration now that the system is back in good health.
If Maker wants to continues to see deposits from vault owners and in turn, the proliferation of DAI in the future, it is within the best interest to ensure user happiness. However, MKR holders must consider the social contract established when compensating vault owners today and how the DAO will handle other situations in the future.
This is a pivotal time for the Maker ecosystem as it has its resiliency tested.
As it stands right now, there’s a 98% majority signalling “Yes” to compensation with over 31,000 MKR in total votes across 16 unique voters.
If the vote passes, we’ll see continued efforts from the foundation and the DAO at large to facilitate the compensation of vault owners.
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Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.