For DeFi’s Sake, Maker Should Take Blame for Black Thursday Losses

Anthony Xie is the founder of HodlBot, a trading tool that enables cryptocurrency investors to automate their trading strategies.

Many lifelong cryptocurrency stalwarts had their savings wiped on Black Thursday when a sudden price crash triggered the auction of under-collateralized ethereum posted in the MakerDAO vaults.

While the system did not technically malfunction, a confluence of factors enabled a few opportunists to win the collateral auctions despite placing extremely low bids.

The question stands as to whether MakerDAO should be held responsible for this incident.

See also: MakerDAO Debts Grow as DeFi Leader Moves to Stabilize Protocol

To better understand this situation, first, some background on how MakerDAO works.

For DAI to maintain its price at $1, it must lock away $1 worth of ether, plus an excess amount in a collateralized debt position.

The point of over-collateralization is to help DAI maintain its currency peg. This way, when the price of ETH falls, the value of the underlying collateral is still equal or greater to the value of  DAI issued. The target liquidation ratio determines the amount of over-collateralization required.

In the event of a price crash, DAI can become under-collateralized.

More than a third of all liquidations were practically free.

The underlying ETH can only withstand so much of a price crash before it becomes less valuable than its corresponding DAI.

In this case, users can trigger collateral auctions on vaults that now have too few holdings.

The Collateral Auction Process

The MakerDAO network deems a vault unsafe once the posted collateral falls below the amount mandated by the liquidation ratio.

When vaults are in breach, any user can trigger a collateral auction by sending a bite transaction identifying the unsafe vault.

Once an auction commences, participants bid with DAI to acquire the collateral.

The highest bid wins the auction when it remains undefeated for the minimum bid duration (10 minutes).

While this auction…

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