The legacy of MakerDAO's failed collateral auctions

MakerDAO, the de-facto central bank of decentralized finance, has been in the midst of one of its most turbulent times. Earlier this month, extreme market volatility and network congestion led to the liquidation of around $4 million dollars of collateral in return for, well, nothing. Typically there are competitive auctions where Keepers bid for the collateral, but due to high gas prices, the automated bots were unable to participate allowing a bidder to essentially steal money from the system. This caused the MKR to selloff worse than the rest of the market as it reached historic lows. While the 50% drop over a 24-hour period was rough, the damage to the system and ensuing actions taken will be how this period is remembered.

Source: Our Network

MKR earnings go negative

To account for the lost capital, Maker governance approved a last-resort measure to auction off newly minted MKR in order to recapitalize the system. The reverse auction worked by accepting lots of 50,000 Dai for a starting amount of 250 MKR (~$200) and bidders offer to accept less MKR for the same amount of Dai thus pushing up the MKR price. The auction has led to the creation of 17,630 MKR, negating more than two years’ worth of “earnings” for MKR holders who failed in their risk management duties to keep the system well-capitalized. While it may have been difficult to foresee, the responsibility ultimately falls on their shoulders to ensure every Dai is backed by more than 150% of its dollar value in ETH.

Real-world assets are here to stay

Now that the auction is over, this mandate is fulfilled but Black Thursday and the subsequent actions taken will have long-lasting effects on the future of Maker. To the dismay of some in the community, USDC was urgently added as a collateral type after the supply of Dai dropped 30% and a liquidity crisis ensued. The swift action is laudable, yet Dai has become the backbone of DeFi because of its decentralized nature and the addition of an inherently centralized asset infringes upon that. It may be a tough pill to swallow but this is the route Maker leadership has seen for the project from the start and this is simply the first step. Now that Pandora’s box has been opened, expect the addition of an increasing number of real-world assets going forward, from more fiatcoins to the most liquid asset in the world.