A large drop in the price of ether (ETH) is testing the feasibility of Ethereum’s entire system of lending and borrowing.
MakerDAO is the largest and most important application in Ethereum’s decentralized finance (DeFi) ecosystem. Right now, it faces an emergency shutdown with $4 million of its dollar-pegged dai stablecoin not backed by an underlying crypto asset, according to a stakeholder call held Thursday.
If a shutdown were to occur, the crypto market would be flooded with some 2.4 million ETH even as the asset’s value plummets amid broader market turmoil.
A spokesperson for the MakerDAO Foundation told CoinDesk: “The MakerDAO community and the Maker Foundation have been working hand-in-hand to monitor, assess and resolve the current situation.”
The Maker protocol works by creating dai loans when users load ETH or BAT into the system as collateral. Maker then automatically sells that collateral when the market tanks in order to get DAI off the market until the system hits its 150 percent collateral target. But the price dropped too sharply for MakerDAO’s automated auctions to keep up.
Last night at 22:00 UTC, ETH was trading at approximately $194, according to CoinDesk’s Ethereum Price Index, only to fall to a low of $124 at about 12:44 UTC today.
The total dollar value of crypto locked in DeFi protocols has plummeted over 20 percent in USD terms overnight (from $889 million to $691 million, as of this writing) – this despite the fact that the total ETH in DeFi has actually increased some 200,000 ETH. The most likely driver: users with loans on Maker looking to boost their collateralization to head off a liquidation.
The MakerDAO Foundation and holders of the MKR governance token are trying to decide what to do right now. Options on the table include lowering the dai savings rate, extending the length of time for liquidation auctions and even triggering the emergency shutdown, effectively a system reboot of MakerDAO.
“We are living in a brave new world,” Rich Brown, the foundation’s head of community, said on the call. “If we were a centralized system we would have a dictator and know what to do.”
In an emergency shutdown, new CDPs are frozen, auctions finalize and remaining dai can be redeemed for ETH at a fixed price set at the time of the shutdown.
“If MakerDAO experiences an emergency shutdown, DAI becomes redeemable for the Ether backing all of the DAI outstanding,” Robert Leshner, founder of DeFi protocol Compound Finance, told CoinDesk. “It stops behaving like a stablecoin, and begins behaving like Ether, price-wise. This will have unintended consequences for the entire ecosystem, some of which have planned for the possibility of this event, and others that have not.”
The MakerDAO community does not have a rule of thumb for a metric that would trigger an emergency shut down.
“This certainly seems like a very rare black swan event,” Tom Bean, co-founder and CEO of trading platform bZx, told CoinDesk. “I don’t recall the last time things fell this hard and fast and caused this much congestion.”
This is a developing story and will be updated as needed.
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