MakerDAO's "Black Thursday"

Editor's Note: This article comes fromCrypto Valley Live (ID: cryptovalley)Crypto Valley Live (ID: cryptovalley)

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• Crypto Valley Live (ID: cryptovalley)

• , Author: whiterabbit, translation: Ziming, reproduced by Odaily with authorization.

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MakerDAO’s liquidation on March 12 and 13 resulted in 5.67 million DAI in bad debt.

With no competitors, liquidators have the opportunity to win the auction with bids of 0 DAI, which account for 36% of all liquidation transactions.

The single Ethereum address that lost the most lost about 35,000 ETH, while the most successful liquidator made a profit of 30,000 ETH.

Across all liquidated transactions, zero-bid auctions liquidated a cumulative Ethereum collateral value of $8.32 million.

Due to the abnormal liquidation mechanism of MakerDAO, the reason why 5.67 million unsecured DAI bad debts were liquidated at 0-bid auction was not due to the sharp drop in price and lack of collateral, but due to the operation of the liquidator in the process.

What actually happened:

1. In the case of blockchain congestion, the Ethereum network gas fee has risen sharply (partially due to the need to update the Chainlink Oracle).

2. Although the gas fee has risen to $30, the huge price jump has resulted in transactions that do not have price updates sent by the MakerDAO Oracle for a long time. Due to the OSM (Oracle Security Module), the market price received by Oracle is significantly delayed.

3. When the price in the agreement is updated, an opportunity to liquidate the position arises. It is worth mentioning that the liquidators used code written by MakerDAO, which did not adjust the high gas fee function in time. This also results in fewer liquidators who can participate in the auction.

4. Certain protocol users have exploited this problem and figured out a way to make money. They start bidding in the auction for the smallest amount of DAI. Since there were no competitors at the time, they almost exchanged a bid of 0 DAI for as much as 50 ETH.

As a result, vault owners, the entire system as well as MKR holders suffered losses, and only a handful of liquidators and DAI holders profited from the event.

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People who care about MakerDAO's governance quickly noticed this problem and called this day "Black Thursday". They gathered on the Risk Call to plan future solutions to eliminate system debt. In addition to launching the Emergency Global Shutdown, they have adopted another measure, which is to launch a debt auction. In such an auction, participants will be able to use DAI to purchase newly minted MKR in this auction. The auction will dilute the token share of current MKR holders. The process of this auction is that the first MKR bidding price starts from 200 DAI, and a total of 250 MKR is sold, which makes it difficult for players with small holdings to participate in the auction. But Dharma created Maker Backstop Syndicate to help them. Digital currency fund Paradigm has also gathered to compete with them in the market.

At the same time, the MakerDao community initiated and passed an administrative vote to adjust multiple risk parameters to reduce the possibility of similar incidents happening again. The proposal will make a series of changes to the protocol, including reducing the Sai stability fee from 2% to 7.5%, reducing the DAI stability fee from 4% to 4%, changing the DSR to 4%, and reducing the cap on the migration contract debt from 20 million to 10 million, increased the Flip auction TTL from 10 minutes to 6 hours, increased the lot size of the Flip auction from 50 ETH to 500 ETH, reduced the maximum duration of the Flip auction from 3 days to 6 hours, increased the The TTL has been increased from 10 minutes to 6 hours, and the debt auction delay has been increased from 48 hours to 6.5 days. It is too early to say how these parameters will affect the system, as they do introduce additional risk and require more capital, but they will undoubtedly complicate fraudulent operations in the future. Currently, the parameters are in use, but it took a whole day to make it work. The reason for this lag is the GSM Governance Security Module, which was activated three weeks ago, causing a delay between receiving the required number of votes and executing the proposal. Rune mentioned on the forum that without GSM the problem could have been resolved earlier, but security and effectiveness are always a trade-off.

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analyze

In order to have a more coherent understanding of the whole incident, we collected data from the Ethereum blockchain for the past two days of cleared transactions.

The following is a brief summary of the data collected:

First, let's take a look at the clearing transactions over the past two days. We see two peaks caused by sharp changes in oracle prices: between 15:00-16:00 (UTC time, the same below) and after 00:00-01:00 the next day.

Some people may ask: Why is there no liquidation immediately after 14 hours of price changes? The reason is that liquidation means that the liquidator with the largest bet wins the transaction, and the transaction is closed. After the 0-bid auction strategy appeared, some liquidators also decided to use this strategy, which led to the emergence of competition. This also protects some of the funds in the vault.

Auctions where the winner receives a 100% collateral discount are considered 0-bid liquidations. In total, the cumulative losses caused by the 0-bid liquidation strategy reached $8.325 million. Their distribution corresponds to the previous liquidation price and volume chart:

After researching the data, we found four addresses using the 0-bid auction strategy. Together they won 62892.93 ETH.

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Let's look at when each account won the first auction with 0 bids. It is clear that this method has been successfully adopted by other competitors after the transaction is included in the block: