MAKERDAO

DESCRIPTION OF EVENTS

"A better, smarter currency. Dai can be used by anyone, anywhere, anytime." "MakerDAO is a decentralized organization dedicated to bringing stability to the cryptocurrency economy. The Maker Protocol employs a two-token system. The first being, Dai, a collateral-backed stablecoin that offers stability. The Maker Foundation and the MakerDAO community believe that a decentralized stablecoin is required to have any business or individual realize the advantages of digital money. Second, there is MKR, a governance token that is used by stakeholders to maintain the system and manage Dai. MKR token holders are the decision-makers of the Maker Protocol, supported by the larger public community and various other external parties."

"The Maker Protocol, also known as the Multi-Collateral Dai (MCD) system, allows users to generate Dai by leveraging collateral assets approved by “Maker Governance.” Maker Governance is the community organized and operated process of managing the various aspects of the Maker Protocol. Dai is a decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar. Resistant to hyperinflation due to its low volatility, Dai offers economic freedom and opportunity to anyone, anywhere."

"Since Maker is decentralized, it can’t use credit scores to verify the creditworthiness of its borrowers. Hence, loans on the platform are overcollateralized, meaning that a borrower supplies more assets that they can take out." "MakerDAO is known as the creator of dai (DAI), the decentralized stablecoin currently beloved by yield farmers. DAI is created with debt. Users put ETH or other crypto-assets up as collateral on the Maker platform to then withdraw a portion of the value of those assets in the form of brand-new DAI." "To get back their collateral, users must repay the DAI they borrowed plus whatever interest the loan has accrued (in MakerDAO parlance this is the “stability fee,” but it’s just a variable interest rate). MakerDAO enforces the DAI price by liquidating collateral if its value falls below the minimum threshold to maintain proper collateralization. For ETH, that’s 150%, but most users put in a lot more ETH than the minimum." "If the collateral value goes below a certain threshold, the loan is marked as undercollateralized, and liquidators can participate in an auction to liquidate the loan for a 13% reward."

"MakerDAO employs a two-phase auction process. In the [first] phase, liquidators compete by bidding to repay parts of the debt in exchange for the entire collateral. In the [second] phase, liquidators compete by bidding to accept decreasing amounts of collateral in exchange for the full debt they will end up repaying. The remaining collateral is returned to the position owner (i.e., the borrower). The auction terminates when any one of the following two conditions is satisfied. Note that the auction can terminate in the [first] phase. (1) Auction Length Condition: the configurable auction length (e.g., 6 hours) has passed since the initiation of the auction. (2) Bid Duration Condition: the configurable bid duration (e.g., 5 hours) has passed since the last bid. After the termination of an auction, the winning liquidator is allowed to finalize the liquidation to claim the proposed collateral."

"Cryptocurrencies were not left out of the turbulence of the past week. Prices crashed in matter of hours. This put #DeFi protocols such as @MakerDAO and @compoundfinance under pressure. We take a look at what happened." "The uncertainty around the coronavirus and the erupting oil price war culminated in a severe downturn in capital markets starting around February 20. That plunge eventually developed into an outright collapse of both the capital and crypto markets over a 36-hour period on March 12-13."

"Maker found itself in a predicament after the crypto market crashed on Mar. 12. The platform ended up in over $8 million in debt as some of its loans were liquidated for free." "The sell-off on March 12th aka “Black Thursday” shrunk the value of Ξ nearly by half $197 - $89 in less than 36h. @MakerDAO lost over $8M worth of @Ethereum to a bot bidding 0 DAI to unlock unbacked Ξ."

"When the market crashed, the activity on Ethereum soared as users panicked." "Due to a combination of high network congestion and low liquidity in $DAI, liquidators were able to win liquidation auctions by bidding 0 DAI on large amounts of ETH. This eventually led to a deficit of $4M in the MakerDAO system buffer."

"The network’s low throughput led to congestion, and many liquidators on Maker stopped working. Consequently, a handful of liquidators won auctions for free because there was no competition."

"Network congestion and high gas prices caused transaction delays and, in many cases, failures. Those issues, combined with the unprecedented drop in the value of assets, caught Maker Vault owners, Keepers, and liquidity pools off-guard. Oracles, the pricing data sources for collateral, functioned appropriately but were affected by the same delays as everyone else. As a result of the above circumstances, a large number of auctions were triggered, and a subset of those auctions won by bidders who submitted bids decimal points above zero (“zero bidders” submitting “zero bids”)."

"Vault owners struggled with high gas prices and transactional delays when attempting to add more collateral or return Dai to their Vaults within the Protocol’s one-hour window." "Because there were no Keeper bots liquidating the vaults, there was an opportunity for exploitation. Someone started bidding for the underlying Eth at a price of $0. As all the other bots were incapacitated, no one was able to compete with this bid in the given Bid Duration (because the auction process was designed to encourage early participation, the bid duration was set to a short timeframe, see the liquidation process). Therefore, someone was able to bid for ~ $8.32 Million worth of Eth for $0, and no one was able to stop it."

"Blocknative, a forensic company, later published a report, saying that not only did users’ panic contributed to the congestion, but also malicious bot activity." "Bots spammed Ethereum with junk transactions that recursively replaced their existing transactions to slow other liquidators down and take advantage of the reduced competition." "Blocknative found an endless stream of clever, worthless transactions in mempools on the day of the attack, apparently designed to make it hard for transactions to get through." "Due to the congestion of Ethereum, the gas soared, and the liquidated ETH was sold at a price of 0 US dollars using the MakerDao auction loophole."

"Monthly accumulated liquidator profit. We observe an outlier for MakerDAO in March, 2020, because the MakerDAO liquidation bots were faulty due to an excessive price decline of ETH." "Around 1,200 Maker Vaults became under-collateralized and were subsequently liquidated. As noted above, the Maker community is currently discussing the circumstances surrounding the zero bids and resulting liquidations. It will ultimately determine how to address the issue around liquidated vaults." “The entire affair meant [the attackers] were able to achieve over 1,000 zero-bid auctions … and collect that underlying value with almost no out-of-pocket expense,” Blocknative CEO Matt Cutler told CoinDesk in an interview. "[M]any MakerDAO users lost their life savings. The largest liquidated CDP lost around 35,000 ETH, equivalent to ~$4 million USD at current prices. Community members are calling for MakerDAO to rectify the situation."

"CDP automation systems such as DeFi Saver were unable to rescue many users’ CDPs, as the price instantly dropped from above their configured minimums to below a 150% collateralization ratio. These users therefore had their CDPs liquidated despite having put safeguards in place, as their safeguards relied on accurate and regularly updated price data."

"Shortly after the exploit occurred, MakerDAO conducted a vote on how to prevent this from happening again. New system parameters have increased the maximum lot size from 50 to 500 ETH and increased the duration of auctions. Further solutions such as minimum bid amounts on auctions are also being explored."

"The price of $DAI shot up, as vault owners were scrambling for DAI to close their positions. The community is now taking steps to rebuild trust in the system, selling MKR in an auction and introducing USDC as collateral (is this still DeFi?)." "The complexity of the MakerDAO system might prove to be its Achilles heel. Liquidators(keepers) are a crucial part of ensuring stability. The process of liquidation should be made clear and easy to prevent this from happening again."

"The sell-off of 12 March resulted in $4.5 million of unbacked DAI in the MakerDAO system." "MakerDAO plan[ned] on filling this bad debt with an auction of MKR tokens." "[A]n MKR token auction will occur on the Maker Protocol, March 19th, tentatively starting at 10:28 ET (14:28 UTC) on March 19. to recapitalize the system, as explained in the whitepaper. This auction is open to anyone; however, all participants must run an Auction Keeper, open-source software that enables users to bid in the auction process."

"During all of this, the Dai peg broke, and the price of Dai went all the way up to $1.20. To help re-establish the peg the MakerDAO governance has voted to add USDC as a collateral type. This will allow for users to trade between USDC and Dai, thus bringing the price of Dai down closer to a dollar."

"A lawsuit was filed against the Maker Foundation in April, accusing the foundation of misrepresenting the protocol's risks to investors. The lawsuit was seeking more than $28 million in total damages from the foundation and several of its affiliates." "In a draft complaint, the Maker Foundation – a non-profit organization supporting the development of the MakerDAO decentralized finance (DeFi) protocol – was accused of misrepresenting the protocol's risks to investors and failing to protect investor interest." "Specifically, the complaint alleges negligence, intentional misrepresentation and negligent misrepresentation in connection with the claimed losses."

"While misrepresenting to CDP Holders the actual risks they faced, The Maker Foundation neglected its responsibilities to its investors by either fostering or, at the very least, allowing the conditions that led to Black Thursday, all after actively soliciting millions of dollars of investment into its ecosystem," the complaint states.

When reached for comment, a Maker Foundation spokesperson told The Block: "The Maker Foundation has no comment with respect to any planned or pending legal actions."

"MakerDAO concluded a governance poll in which Maker token holders decided not to compensate Vault owners who suffered losses by liquidations during the March 12-13 market crash." "A total of 38 MKR holders participated in the poll, who own around 88,000 MKR tokens. More than 57,000 MKR, or 65% of the total votes, voted against any compensation."

"Once again, we thank the community for rallying around Maker and for their enthusiasm to discuss, debate, and decide on the Maker Protocol’s parameters at the height of the recent market tumult. Participation in this auction and in Maker governance by the community and any interested party will serve to strengthen the Maker Protocol now and in the future."

"The Maker Foundation has announced it is turning over operations entirely to its decentralized autonomous organization (DAO), MakerDAO, as founder Rune Christensen has long promised." “The Foundation will formally dissolve within the next few months,” Christensen wrote in a blog post shared in advance with CoinDesk. No more specific timeline was offered.

MakerDAO is the system behind the DAI stablecoin. As part of the DAI stabilizing mechanism, the platform has a system which allows for bids on liquidations. Due to the ethereum price drop, liquidations were triggered.

In order to cast a bid, an ethereum transaction is required. Due to high prices, caused by attackers flooding the network with transactions, bids could not be cast. As a result, attackers were able to win the liquidations with $0 bids.

There was nothing that affected users could do. Both the lawsuit and governance proposal were unsuccessful in returning any funds.

HOW COULD THIS HAVE BEEN PREVENTED?

The MakerDAO protocol stored all user funds in an online smart contract hot wallet, with no control to prevent the catastrophe of liquidations. Had the system relied on better oracles for value, and had contingencies to handle blockchain overloads, significant funds could have been saved. A self-insurance or industry insurance fund could provide assistance in extreme events, that could soften the impact for affected users.

Check Our Framework For Safe Secure Exchange Platforms

SlowMist Hacked - SlowMist Zone (May 18)
Millions Lost: The Top 19 DeFi Cryptocurrency Hacks of 2020 | Crypto Briefing (May 22)
The Maker Protocol White Paper | Feb 2020 (Jul 26)
The Market Collapse of March 12-13, 2020: How It Impacted MakerDAO (Jul 27)
An Empirical Study of DeFi Liquidations: Incentives, Risks, and Instabilities (Jul 27)
Mempool Manipulation Enabled Theft of $8M in MakerDAO Collateral on Black Thursday: Report - CoinDesk (Jul 27)
Black Thursday Makerdaos Multi Collateral Dai Exploitation And The Plan To Recover (Jul 27)
MKR Debt Auction Announcement and Details (Jul 27)
What Really Happened To MakerDAO? (Jul 27)
MakerDAO won't compensate Vaults affected by liquidations during the March market crash (Jul 27)
'Black Thursday' losses spur $28 million class-action lawsuit against Maker Foundation (Jul 27)
Complaint | Class Action | Misrepresentation (Jul 27)
Scribd (Jul 27)
No, you did not lose 100%. : MakerDAO (Jul 27)
MakerDAO Moves to Full Decentralization; Maker Foundation to Close in 'Months' - CoinDesk (Jul 27)
https://mobile.twitter.com/certik_io/status/1313478886022361088 (Jan 10)
MakerDAO | An Unbiased Global Financial System (Jun 24)
$30M MakerDAO 'Black Thursday' lawsuit sent to arbitration (Jan 13)
$28M MakerDAO 'Black Thursday' Lawsuit Moves to Arbitration - CoinDesk (Jan 13)
https://medium.com/@whiterabbit_hq/black-thursday-for-makerdao-8-32-million-was-liquidated-for-0-dai-36b83cac56b6 (Jan 13)
Black Thursday Response Thread - Risk - The Maker Forum (Jan 13)
A Black Thursday Retrospective (Jan 13)
Makerdao Vote to Not Compensate Black Thursday Victims Receives Harsh Criticism – Bitcoin News (Jan 13)
Black Thursday for MakerDAO: $8.32 million was liquidated for 0 DAI : MakerDAO (Jan 13)
MakerDAO Technical Docs - MakerDAO Technical Docs (Jan 13)
Dai Another Day (Jul 26)
@amanusk_ Twitter (Jul 26)
A brief history of Stablecoins (Part 1) | BitMEX Blog (Oct 28)

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