📟 Managing MakerDAO Vault Liquidations with Notifications

TLDR; Today we are excited to release an industry-defining notification engine for the Ethereum blockchain. In light of recent events that occurred with the Maker system, we leaned into our product roadmap to ship this urgent feature today rather than sometime later in the year. Our vision is to materially reduce the number of liquidations that happen to borrowers because nobody should lose funds due to bad or unavailable data.

What happened on Thursday (Mar 12, 2020)

First, a recap of what happened last week. A first for the entire DeFi ecosystem and hopefully the last of this magnitude. A reminder of how early we are and how much work there is remaining to be done. The gist –

1. The price of ETH dropped 30% in a matter of hours possibly due to the global COVID-19 news.
2. Lots of Maker Vaults (formerly known as CDPs) got liquidated as a result of the ETH price drop because they could not maintain their minimum 150% collateralization ratio.

No doubt, getting liquidated sucks because the borrower loses their collateral. But the liquidation mechanism by itself isn’t noteworthy.

Wild swings in cryptocurrency prices are common. The liquidation mechanism in Maker is designed to keep DAI from becoming under-collateralized. Normally, an auction is held for a bot (known as a “keeper”) to submit a liquidation bid and the remaining collateral is returned to the vault owner upon liquidation.

What’s interesting about Mar 12, 2020 — is the cascading failures that amplified the impact of liquidations:

1. Gas prices through the roof

Gas is how a user of Ethereum incentivizes miners to pick up their transactions and in this case — topping up their ETH collateral or repaying some of their DAI. The extremely high gas prices made it very expensive for the borrowers to save their vaults.

2. Low DAI liquidity

Second, for the keepers to bid on the auctions, they needed DAI. With so much demand for DAI and very little liquidity, DAI lost its peg to the US dollar. When there’s ample supply of DAI, the auction process will keep the bids honest. But in this case, a combination of high gas prices along with low DAI liquidity led to keepers dropping off from participating in the auctions. A single keeper found an “exploit” and was able to place bids for just 0.01 DAI. These auctions have a very short window to finalize — just 10 minutes. Because there were no other/better bids, the auctions finalized for essentially 100% profit for the keeper.

3. Oracle malfunction

Third, the Maker oracle reported wrong prices ETH-USD for a couple of hours. This was most likely due to Ethereum congestion with the high gas prices — the updated prices could not be written to the blockchain.

Bottom line: About 5 million DAI was lost due to liquidations. A third of them were free with 100% profit for the keepers. Vault holders were hurt, but they have no legal recourse. Some of this loss could have been avoided.

Read the complete post here: https://www.covalenthq.com/blog/makerdao-liquidation-notifications/