MakerDAO is a leading firm in the burgeoning sector of decentralized finance (DeFI). It is set up on the Ethereum network. MakerDAO has speedily called for a community vote on March 13, which is scheduled to take place ahead of the project’s first-ever Debt Auction.
According to Maker (MKR), this vote will determine the needed modifications that were discovered in the fallout from the recent crypto market bloodbath. The market meltdown saw the price of ETH plunged by over 30% in 24 hours.
Ether meltdown causes Maker loan failures
MakerDAO is the DeFi protocol that develops the stablecoin Dai (DAI). The Dai coins are minted by users taking on collateralized debt positions with collateral typically consisting of ETH. This collateral is deposited in an Ethereum smart-contract with a part of the collateralized assets’ value getting paid out in the form of Dai.
The collateral is released back to the users when the outstanding tokens are repaid, which in turn destroys Dai. Also, the collateral is used to drive the stabilization of Dai’s value. The network incentivizes either the creation or destruction of Dai subject to the tokens trading above or below $1.
The loans that can no longer get supported by their collateral go into liquidation proceedings. In these cases, the collateral is auctioned in exchange for Dai to repay outstanding debts. Nevertheless, a lack of competition in the plunging crypto prices means that some of the bidders could win liquidation auctions in exchange for 0 DAI, in turn, intensifying Maker’s debt crisis.
Maker’s first-ever debt auction
The Maker project will see a Debt Auction for the first time in its history where a system-wide failure in the value of the collateralized loans to support circulating DAI causes a programmatic printing of MKR tokens. These tokens are auctioned in exchange for Dai to balance all of the outstanding debts.
Due to the imploding crypto prices, MakerDAO at the moment has $4 million worth of the outstanding under-collateralized debt. The planned auction will result in MKR token holders getting inflated. According to an official Maker blog post:
“The MakerDAO had a +500k$ surplus before the price drop, and now has a -4M$ surplus that needs to be filled. The protocol covers this issue, the solution being to trigger an MKR mint and auction, the DAI raised being used to fill the surplus debt. During normal operation, MKR is burned when debt from vaults is reimbursed; this would be the opposite mechanism.”
The possibly planned modifications are intended to prevent 0 DAI bids from winning future liquidation auctions, which will be voted on by the community on March 13.