MakerDAO under Fire
The future of Decentralized Finance (DeFi) may be changed as one of the largest platforms that have helped the space accrue more than $1 billion of collateral in their platform. In addition to a number of exploits and challenges issues happening around DeFi as of late, the MakerDAO platform had to deal with a Crypto market price plunge in March which sent prices of most cryptocurrencies down over 40% in a number of hours. This set in motion a number of liquidations on many DeFi platforms as collateral staked or deposited could no longer back up outstanding drawings or loans.
In the case of MakerDAO, users can deposit cryptocurrencies like ETH which is the most commonly used in exchange for issuing the DAI stablecoin. However, the loan is collateralized by that asset staked/deposited. If their value drops, they will be liquidated to protect the value of each DAI. Much like margin calls in traditional financial markets, liquidations come fast and are brutal as they just add fuel to fire of selling of asset prices. Fire Sales are prevalent when these liquidations are triggered.
Given that the concept has existed for decades, it was not surprising to see some of the action seen that day. However, once the dust settled around the markets, the chaos ensued as many participants saw that the liquidation prices of the collateral were for pennies instead of the actual fair market values as the time. Some have said that some were liquidated for zero value! What is concerning is that most participants have thought that the largest amount of asset value at risk when liquidated would be 13% due to the overall overcollateralization in the platform.
MakerDAO, now being sued, is working with the community for viable options to share the losses across a broad set of participants including stopping the Daily Savings Rate currently offered on DAI. Unfortunately, achieving consensus in any type of decentralized structure is complex and will always lead to some polarization. The potential of this will be the delayed growth and adoption of this and other DeFi platforms despite their great potential amid an economic crisis never before seen. This is surely something to watch carefully!
Reference: https://www.coindesk.com/makerdao-users-sue-stablecoin-issuer-following-black-thursday-losses?ref=coingecko
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