MakerDAO Avoids Shutdown, to Auction MKR Covering $4M in Bad Debt

MakerDao, one of the largest decentralized finance (DeFi) projects on Ethereum, will begin the auction of MKR governance token in two days – a step forced by the recent freefall of Ethereum.

The auction was triggered as the under-collateralized debts on the platform reached $4 million and is a step taken for the first time in the history of the project. The platform will programmatically mint and set the MKR tokens 50,000 DAI increments. All the funds will be utilized to cover outstanding bad debts.

The DeFi project issues loans in DAO, a stablecoin, against Ethereum or Basic Attention Token (BAT) as collateral.

However, its woes started yesterday when cryptocurrencies including Ethereum took a free fall plunging more than 30 percent in merely an hour.

Though in case of any abrupt market changes, Maker automatically sells the collateral to minimize the damages and take DAO off the market until the system hits its 150 percent collateral target, yesterday’s Ethereum price slump was too sharp and the automated auction could not trigger.

Extreme measures are mandatory

This even forced the stakeholders of the project to consider a shutdown of the protocol as an extreme measure.

“An emergency shutdown (not happening now) would cause DAI holders to take a haircut, whereas the social contract of MakerDAO is that MKR tokens take a haircut in the event of system failure. Therefore we should try and ensure that MKR holders take a hair cut by avoiding emergency shutdown if possible. I heard that emergency shutdown is not being considered as an immediate option,” Ryan Berckmans, an Ethereum developer wrote in a response call.

The community, however, will also re-evaluate the shutting down of the protocol if Ethereum plummets further.

“If Ether price drops another 30, 40%, then we might be looking at that,” LongForWisdom said on the call.

“Keepers and MKR buyers should prepare for sustained high gas prices, and downward pressure on ETH and MKR. The Dow Jones hit sell-off circuit breakers three times in the past week and a half. It’s a historic week,” Berckmans added.

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