MakerDAO’s Black Thursday: Collateral Sold at 0 Price

Editor's Note: This article is from:Ethereum enthusiasts (ID: ethfans)Ethereum enthusiasts (ID: ethfans)

Summary:

• Ethereum enthusiasts (ID: ethfans)

• , author: whiterabbit, translation: A Jian, reproduced by Odaily with authorization.

• Summary:

• This is because some people won the liquidity auction with a price close to 0, and this part of the collateral accounted for 36% of the total auction volume

background introduction

The Vault debt warehouse with the largest loss lost about 35,000 ETH

A total of $8.32 million worth of ETH was auctioned at 0

1. background introduction

2. The sharp drop in the price of ETH, as well as the congestion of the Ethereum blockchain, led to a deficit in the MakerDAO protocol system (the platform itself began to be in debt), because the collateral of $5.67 million in DAI was not enough to support its value. The problem is not caused by the rapid drop of ETH price, but because of the operation methods of some keepers (liquidators).

3. The facts are as follows:

4. The Gas Price required to package the transaction on the chain gradually increases with the congestion of the Ethereum blockchain (part of the congestion is due to the fact that updating the Chainlink oracle consumes a lot of Gas)

5. The soaring Gas Price caused MakerDAO's oracles to be unable to send transactions with price updates to MakerDAO, even though they had raised the Gas Price of transactions to about $30. Likewise, the price received by the oracle is lagged due to the OSM (Oracle Security Model).

6. By the time the price in the agreement is updated, a large number of liquidation profit opportunities have appeared in the system. It should be pointed out that some liquidators use scripts from MakerDAO, which will not automatically increase the Gas Price, which reduces the number of liquidators actually participating in the liquidation.

It occurred to a user that the problem of network congestion created a once-in-a-lifetime unique profit opportunity. They start sending the minimum amount of DAI required for the auction. Because no one was competing with them at that time, they got a lot of liquidated assets up to 50 ETH at close to 0 DAI bids (Translator's Note: This is partly because the auction period was not set long enough).

Over time, the state of the network changes and other liquidators start using this strategy.

As a result, Vault (debt warehouse) owners, the system itself, and MKR token holders (mainly the latter) all suffered losses. A small number of liquidators and DAI holders benefited from this incident, because the price of DAI also increased by $1 due to the need for liquidity.

analyze

Those concerned with MakerDAO's governance quickly became aware of the problem, dubbed the day "Black Thursday," and organized a conference call to plan measures to eliminate the system's debt. They did not adopt the method of emergency global shutdown (Emergency Global Shutdown), but adopted a plan that did not cause so much damage to the entire ecology, called "debt auction". At the auction, users can use DAI to buy newly minted MKR tokens. Doing so also dilutes the share held by current MKR holders. The expected selling price is 200 DAI, and the number of MKR in one lot is 250 (only buy by lot), so it is difficult for small players to participate. Dharma proposed a Maker Backstop Syndicate program to help small retail investors pool their money to participate in auctions. And Paradigm has organized itself to compete with Dharma.

At the same time, people have also discussed new system parameters in the MakerDAO forums, which should avoid repeating the same mistakes. The maximum auction amount for a single auction has been increased from 50 ETH to 500 ETH, and the auction period has also been extended. It is difficult to say how these adjustments will affect the overall system, because these parameters also introduce additional risks and require more capital to participate, but they will obviously make it more difficult for ulterior manipulation activities such as Black Thursday. Currently, these parameters have been adjusted, but there is a gap of 1 full day between the consensus of governance and the actual completion of the upgrade. This lag is determined by the GSM (Governance Security Module) three weeks ago - this module makes it take a while for the proposal to be implemented after the voting result is out. Rune mentioned on the forum that if there is no GSM, the problems that arise during the auction process can be resolved faster. However, security always has to be sacrificed.

To gain a coherent understanding of the situation, we collected liquidity data for the past two days (Translator's Note: This article was written on March 15). The data are all from the Ethereum blockchain.

Here is a brief summary of what can be drawn from the data:

Let's take a look at the liquidation of the past two days as a whole. We can see the peak of liquidation activity closely related to the sudden change in the price of the oracle machine: that is, the peak of 15:00 to 16:00 and the peak of the next day from 0:00 to 1:00 (UTC is uniformly used here and below, Coordinated Universal Time) .

- Distribution of liquidation volume from March 12th to 13th, data from the Ethereum blockchain -

One might ask: why isn't there an increase in liquidation activity immediately when the price changes (around 14 o'clock)? The answer is: because MakerDAO's debt warehouse liquidation is the collateral provided by auction users for debts, and the liquidation can only be completed if the auction is successful. After the 0-price auction strategy came out, some liquidators started doing it too, which led to some competition. This competitive activity preserves some of the value of the debt positions.

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- 0 price auction liquidator's cumulative profit trend, the data comes from the Ethereum blockchain -

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- Discount distribution of liquidation activity, data from Ethereum blockchain -

In summary, we found 4 addresses using the 0-price bidding strategy. In total they earned 62892.93 ETH:

• 0x9c05a05893ada984fc20d0da0c046de5cc0e8273 2020–03–12 12:49:00

• 0x9631a838a81d4050c43c66bc03a0cf414243f661 2020–03–12 13:02:00

• 0xb00b6d69822da235a99d2242376066507c9a97b7 2020–03–12 13:09:00

• 0xb400cd43dc25db30c07e665903a052ac120c30ad 2020–03–12 15:48:00

• 0x6066be9369b4eaf5847c9f01eb52ae1e81f2d6b0 2020–03–12 16:59:00

• 0xb8bbf36ba36fc78f3f137c514af33709fffba604 2020–03–12 20:46:00

• 0xcdef772ca4f12c4fe23c09a3961186d065a6a4ca 2020–03–13 00:15:00

• 0xc2f61a6eeec48d686901d325cde9233b81c793f3 2020–03–13 01:15:00

- Keeper using 0-price bidding strategy, the data comes from the Ethereum blockchain -

Let's take a look at the initiation times of these transactions using 0-price bids in the first batch of auctions. Apparently, after these transactions were included in blocks, their competitors started to follow suit:

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in conclusion

- Distribution of the liquidation volume of the top 10 Vaults with the largest losses, the data comes from the Ethereum blockchain -

You may have noticed that one of the bond positions lost close to 35,000 ETH. Other Vaults had much less losses, but they disclosed on social media, such as Vault #849 and Vault #4458 and users of other debt warehouses disclosed information on the Reddit forum.