The Maker protocol allows DeFi users to collateralize popular crypto assets like ETH and BAT into Maker Vaults in return for a DAI-based loan. If the collateralization ratio ever falls below 150%, the system automatically liquidates the collateral until the value of the collateral reaches the threshold again. This mechanism ensures stability for Dai as the stablecoin will always be sufficiently collateralized.
With that in mind, the severe drop in the price of Ether outpaced Maker's automated auctions as they failed to keep up with the volatility. As a result, nearly $4M of Dai is left under-collateralized, bringing a significant amount of stress into the system. Despite the significant under-collateralization, Dai still holds its peg at $1.02 - likely due to the strong demand for stability amid high volatility.
According to a source from CoinDesk, "The Maker Community and the Maker Foundation have been working hand in hand to monitor, assess, and resolve the current situation".
As such, an emergency shutdown is under consideration. However, nothing is finalized and other solutions are still under review. The outlying problem is that an emergency shutdown (right now) would cause DAI holders to take a loss, whereas the social contract for the Maker protocol is that MKR holders would incur the loss in the event of a system failure.
MakerDAO may elect to mint new MKR to sufficiently collateralize the remaining Dai. If this were to happen, the system would have to mint over 13,333 MKR to cover the debt.
Since the news broke, the price of MKR is down by nearly -40% to a price just under $300.
In the instance of an emergency shutdown, new Vaults will be frozen, auctions finalized and the remaining DAI can be redeemed for ETH at a fixed price set at the time of the shutdown. The emergency shutdown would be a massive hit to the protocol as it would result in Dai to stop behaving like a normal stablecoin and behaving more like Ether (price-wise) as all Dai is now redeemable for the Ether at the value of all of the outstanding Dai.
Ultimately, the global pandemic is taking a hit on all financials markets - including our new, nascent open financial system.
Stay safe out there, we'll continue to update this post as new information is released!
Update: Maker Releases Official Blog Post
Following yesterday's events, MakerDAO has officially released their blog post surrounding the incident.
The key takeaways from the post: The Keeper system crumbled under the extremely volatility as some were able to bid close to 0 Dai for batches of 50 ETH collateral. The result ended with $4.5M in liquidations.
It is important to note that the Maker Protocol is still functioning, however, the MakerDAO community will hold an executive vote today (Friday, March 13th) to adjust parameters to help ensure a similar situation doesn't happen again. The focus for the paramter adjustments is to restore the Dai peg closer to 1 USD (Dai is at $1.03 as of writing).
You can view and vote on the parameter changes here.
In terms of re-collateralizing the system, the Maker protocol will mint and auction MKR in return for Dai on Wednesday, March 18th. The MKR is minted into circulation and then sold to bidders for Dai until the system raised a sufficient amount of capital in the form of Dai (~$5.7M as of writing).