A $5M Loan Has Been Liquidated on MakerDAO

Editor's Note: This article comes fromCoindesk,author:Christine Kim, Translator: Cha Liang

Editor: Lu Xiaoming

Editor's Note: This article comes from

,author:

, Translator: Cha Liang

Editor: Lu Xiaoming

A decentralized stablecoin does not rely on custodians, managers or auditors to ensure the coin's price is stable, but it does rely on trusting that the smart contract code is functioning as intended.

This trustless principle has driven the creation of the most popular Ethereum-based stablecoin, DAI, developed by an organization called MakerDAO.

Their DAI stablecoin was launched in December 2017, and even though the value of Ether has since dropped over 90% and the supply of DAI continues to increase, it maintains a stable peg to the US dollar, 1 DAI = $1.

The resilience of DAI is due to the mortgage and loan system at the core of the system. Loans are created and new DAI issued through so-called Collateralized Debt Positions (CDPs).

The concept of a CDP is a cryptographic variant of financial market derivatives such as CDOs. This concept has been implemented in projects like MakerDAO, and some of the principles have been applied to other cryptographic protocols. Fundamentally, a CDP represents a debt position backed by an underlying pool of assets. For security tokens, a CDP represents a debt contract collateralized by a pool of cryptographic securities.

How does MakerDAO work? Anyone with ether (ETH) can open a CDP by locking their ETH as collateral and withdrawing DAI as a debt. The condition is that each borrower must retain at least 150% of the value of the DAI they borrow in the CDP as ETH collateral.

This means for every $1 you borrow, you have to lock up $1.50 in ETH as collateral. When the borrowed DAI is repaid, the locked ETH is returned to the user minus a stability fee or system usage fee.

If your ETH is worth less than 150% of what you borrowed, then your ETH will be liquidated at the current price to pay back your loan plus fees plus penalties. You keep what's left.

The biggest danger of using CDP is the risk of sudden and large price drop of ETH.

Because this is a completely open system, anyone can see which CDPs were liquidated, when and at what ETH price.

About 37,000 ETH (more than $5 million) has been lost to liquidation fines on MakerDAO so far, software engineer at ethereum research and development startup Decenter Nenad Palinkasevic told CoinDesk. In addition, Palinkasevic emphasized that out of a total of 16,249 CDPs created by users, about 14%, or 2,278 CDP smart contracts, were eventually forced to liquidate.

So how are decisions about fees, penalties and changes made?

The purpose of the system is to be governed in part by a governance token called MKR, which allows holders to both make decisions about the system and act as leverage to stabilize the price of DAI.

The MakerDAO team initially developed the smart contract system, but since the contracts are live, they no longer have direct control over them. They guide decisions, but MKR token holders decide or vote on whether action should be taken.

The process begins with the MakerDAO team putting up a vote and stating their reasons for why they want MKR token holders to support them.

For example, during the last increase in the stability fee (the fee to open a CDP), they believe that DAI has been hovering in the range of around $0.975 to $0.985 for the past 2 months, and that the increase in the stability fee may bring the price back closer to $1.0.

MKR token holders have voted 5 times to change the stability fee (the fee to use the CDP).