Auction System in DeFi MakerDAO Altered by Drop in Ether’s Price

The platform liquidated Ether collaterals with zero-dollar bids last March 12th. Maker is investigating what happened but it ruled out attacks or errors.

The rapid fall of the cryptocurrency market last March 12th affected the decentralized finance platform MakerDAO, with a 32% drop in the price of Ether (ETH). The cryptocurrency went from USD 144 to USD 95 in a matter of hours, altering its auction system of Ether collaterals, which users acquired with zero-dollar bids.

Users denounced that “free” funds went to the operators of the system based on the DAI token, a crypto asset that operates under the ERC-20 protocol of the Ethereum network. Twitter user @ercwl questioned what had happened, despite not knowing the causes.

Another Twitter user, Eric Wall, reported that some ETH collaterals in @MakerDAO were liquidated for USD 0, without apparent reason. He explained that this Ether can only be bought with DAI and there were no DAI offers. Mr. Wall believes that it could be a liquidity problem or a connectivity/GAS problem with the maintenance software.

Also, Eric Wall clarified that the liquidation of Ether for USD 0 means that someone received it for “free”. He said that miners might have done this by censoring those bids, but these auctions only last 10 minutes. He concludes that it would be a pretty serious censorship attack but there is no evidence.

Udi Wertheimer stated that there were a lot of liquidations of Maker (MKR) on March 12th, which is normal and expected. What is not normal and expected is, given that this information is correct, that people were able to buy the liquidated collateral for free.

MakerDAO stated on March 12th saying that the steep drop in the price of Ether stressed the Maker protocol, the community, the Maker Foundation, and the entire Ethereum DeFi ecosystem. The organization indicated that these circumstances allowed some users (guardians) to bid close to 0 DAI for lots of 50 ETH collaterals.

During the drop in the price of Ether, a Maker oracle was slow to provide the most current price. Even though it was unintentional, it had the side effect of helping Maker’s vaults to remain overcollateralized. This gave some users enough time to add collaterals to avoid liquidation.

A release indicated that the current state of the Maker protocol is healthy, with no detection of hacking or internal errors. Besides, it did not report any plans to turn off the platform for what happened, but the need to make certain modifications.

The fall in the prices of Ether, and crypto currencies, in general, technically affected the MakerDAO platform. However, the market, in general, has also been in the red this week due to the global expansion of the coronavirus pandemic. In the case of Bitcoin, the first cryptocurrency fell to USD 4700 per unit last March 12th.

MakerDAO is a decentralized system that uses its DAI token, with a 1:1 parity with the US dollar. However, it employs a collateralization ratio, which has to be 150% or more, with the cryptocurrency Ether. In other words, the price of each DAI is fixed with a deposit in Ether to a smart contract called CDP (Guaranteed Debt Position). Depending on the collateral amount deposited, a certain amount of DAI is generated.

By Willmen Blanco


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