On March 12, ether (ETH) saw a dramatic drop in price, losing 30% value in approximately 24 hours. This, plus a rapid increase in gas prices put stress on the Maker Protocol, the community, the Maker Foundation, and the Ethereum DeFi ecosystem as a whole.
DeFi rate explained it this way: “…the severe drop in the price of Ether outpaced Maker’s automated auctions as they failed to keep up with the volatility. As a result, nearly $4 (million) of Dai is left under-collateralized, bringing a significant amount of stress into the system. Despite the significant under-collateralization, Dai still holds its peg at $1.02 – likely due to the strong demand for stability amid high volatility.”
There was also a glitch according to the MakerDao blog post: during the ETH price crash, a Maker oracle — a mechanism used to obtain the real-time price of assets, which determines whether CDP (Collateralized Debt Position) has enough collateral locked up — was slow to provide the most current price. While this was unintentional, it had the knock-on effect of actually helping Maker Vaults remain overcollateralized, giving some users enough time to add collateral to avoid liquidation. However, the specifics regarding the issue of the price feed delay itself are still under investigation and will be shared and addressed as soon as possible.
The Protocol will now mint and sell MKR to re-collateralize the system, and if the Collateral Auction does not raise enough Dai to cover the Vault’s outstanding obligation, the deficit is converted into Protocol debt. Protocol debt is covered by the Dai in the Maker Buffer (which according to a Twitter post was at $500k and used up). If there is not enough Dai in the Buffer, the Protocol triggers a Debt Auction. During a Debt Auction, MKR is minted by the system (increasing the amount of MKR in circulation), and then sold to bidders for Dai.
“The activities tested the Maker Protocol and the people who use and support it. The community successfully navigated a brutal storm of external realities, which included rapid devaluation of collateral and a spike in gas prices. The events ultimately showcase the critical importance of an entire community coming together to monitor and protect the system as it decentralizes,” MakerDao wrote in a blog post, adding that “the current state of the Maker Protocol is healthy. However, while there was no hack, no bug, and no Emergency Shutdown planned, modifications will need to be made.”