The "Nine Deaths" of Ethereum DeFi

LongHash Blockchain Information (ID: Kyle Torpey)

LongHash Blockchain Information (ID: Kyle Torpey)

The value of assets locked in DeFi applications surpassed $1 billion earlier this year, while smart contract activity that facilitates Ethereum-based financial ecosystems has also seen a strong uptick. Much of this growth has to do with the attractively high interest rates offered by these protocols.

After injecting $2 million in liquidity into the Compound and dYdX protocols, Coinbase praised DeFi as "the foundation of an open financial system because it is anti-regulation, impartial, programmable, and anyone with a smartphone can use DeFi applications." program."

But last week's market crash seems to have broken this narrative - the 50% plunge in ether has plunged the DeFi ecosystem into chaos. As the top DeFi protocol, MakerDAO is undoubtedly the best example of the current situation. When struggling to deal with the chaos caused by the plunge of ETH, MakerDAO even discussed the possibility of emergency shutdown.

About MakerDAO

The protocol is so famous that the crypto arm of legendary venture capital firm Andreessen Horowitz invested $15 million in the protocol’s governance token, MKR, in 2018. This represents the company subscribed to 6% of the total token supply at the time.

However, despite the mandatory overcollateralization of at least 150% on DAI-based Maker loans, last week’s market crisis quickly exposed MakerDAO’s vulnerabilities — vulnerabilities that some analysts say could threaten the viability of DeFi.

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What happened to DeFi in the past week

After reaching a price of $9,200 on March 7, the price of Bitcoin took a sharp turn, and the S&P 500 Index and most other indexes and assets began to plummet. In the end, affected by the high leverage on the futures exchange, Bitcoin once bottomed out at 3,800 Dollar.

Altcoins have unsurprisingly been linked to Bitcoin’s downtrend, and ETH has not been spared. At one point, ETH bottomed out trading at $90 — a 64% drop from its highs the week before the drop, according to data on TradingView.

As a result of this slump — ETH’s worst one-day drop ever, according to CoinMetrics’ Nic Carter — MakerDAO has also been dragged into the crisis.

As shown in the above chart, once the price of ETH starts to experience extreme fluctuations, Maker loans will soon trigger liquidation. (Note: The picture above shows the liquidation of a Single Collateral Dai (SCD, single collateral) loan, which is a relatively small variant of the stablecoin DAI.) There are also Multi Collateral Dai (MCD) worth millions. , multi-collateral) loans, the main variant of DAI, were also liquidated. )

Although it is normal for loans to be liquidated, there is a problem: the way these loans are liquidated does not match the description in the MakerDAO white paper." Keeper "More specifically, according to first-hand accounts posted on MakerDAO's Reddit subaccount, the owners of the liquidated loans did not receive any of the ETH they had staked, despite the theoretical liquidation fee allegedly rising to 13%.

DeFiPulse, a decentralized financial data provider, analyzed that due to the influx of large-scale transactions synchronized with the collapse of ETH, the price oracles that provided data to the DeFi ecosystem collapsed. This view has also been echoed by Ethereum developer and supporter Marc Zeller. DeFiPulse wrote:

Zeller pointed out that the superposition of two factors—1) the deviation between the price of ETH given by the oracle and the actual market price; 2) network congestion—caused the loan liquidator (ie

This Keeper won the auction, which allowed them to obtain millions of dollars worth of ETH for free, but it also caused a gap of millions of dollars in DAI token collateral assets."Mature"secondary title

survive

Since the outbreak of mass liquidation, the future of MakerDAO has also become murky. The protocol has never had such a large loss, and the crypto market has never experienced such a large loss in such a short period of time (at least in its current

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status). In addition, the price of DAI, which should theoretically be close to $1, has begun to diverge greatly, even reaching $1.2 on some exchanges.

On March 12, the MakerDAO Foundation and MKR holders considered shutting down its protocol completely in the short term to mitigate further risks. The shutdown of the protocol will result in a freeze on new loans, the end of the debt auction, and the redemption of DAI at a fixed price.

Fortunately for DAI holders, the protocol has not been shut down so far. Instead, Maker will try to address the shortfall in DAI collateral in other ways.

So far, they have taken a series of steps to re-stabilize the entire system.

In order to address the collateral asset gap of DAI, MakerDAO plans to auction a newly minted MKR on March 18 (now postponed to March 19), increasing the circulation of the token. This sale should be enough to pay off the debt, although it would hurt MKR holders as their holdings lose value. For details about the auction, please refer to the explanation given by the encrypted data company Messari.

According to Daistats, there is currently a $5.3 million shortfall in collateralized DAI assets, which means that the upcoming MKR auction will increase the asset’s supply by about 2.6%, assuming a market cap of about $205 million for MKR.

Industry players including fiat-to-DeFi platform Dharma and crypto asset fund Paradigm have expressed a strong willingness to participate in the auction, seemingly to bolster the value of MKR, as well as the rest of the Maker ecosystem.

As mentioned earlier, there is also the problem of the loan owner completely losing their mortgaged assets. It’s not clear if this was done to keep some borrowers’ interests intact, although there is a perception that liquidated loan owners not getting any ETH back is the result of free market action rather than a problem with Maker governance.

So far, most members of the community are inclined to incorporate USDC urgently, although the plan has not yet been finalized, because if the community reaches an agreement on this, technical upgrades must be carried out to ensure the smooth implementation of the plan.

As of this writing, there are still doubts about Maker's stability due to unresolved debts, given that DAI still trades at a 5% premium to $1, according to CoinMarketCap. It is entirely feasible that the foundation and MKR holders continue to try to find new ways to correct the current situation while mitigating further risks.

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not ready for mainstream

Although the health of the DeFi ecosystem has begun to recover from last week's big crash, the mental stress that investors, especially DeFi users, have been under has not disappeared.

Tushar Jain, a partner at cryptocurrency and blockchain investment fund Multicoin Capital, expressed his fears in a long tweet, writing:

"Today, the entire DeFi ecosystem has almost completely collapsed. Several large market players have gone bankrupt... If we had to accept the fact that cryptocurrencies could drop by more than 60% in one day, that would 'severely' limit the technology Availability."

Others in the industry echoed his skepticism about DeFi's potential to face crypto market volatility.

Bitcoin proponents are particularly complacent about this unfortunate debacle, seeing it as proof that these de-facto decentralized banks can never be decentralized and not worth mentioning in this financial revolution. Lightning Labs lead team member Alex Bosworth wrote:

LongHash“Selling high-risk ‘decentralized’ projects to retail investors, trying to swindle adoption? Six months later: losses accumulating, urgent financial bailout required.”