The Block: ETH market faces $500 million liquidation if price drops below $2,100

An automatic liquidation of $500 million in ether (ETH) could occur on-chain if its price falls below $2,100, causing a Maker vault holder's position to become under-collateralized and putting further downward pressure on the second-biggest cryptocurrency.

As Russia's invasion of Ukraine roils crypto markets , a pseudonymous Maker vault holder called “7-Siblings” could see $500 million in ETH seized and sold if the price drops another 14% from its current level, according to data from Block Analitica. The market drama comes less than a month after the same investor narrowly escaped a $600 million liquidation.

Going by Block Analitica's data, 7-Siblings has multiple debt positions on Maker vaults totalling about $500 million. All these positions have liquidation prices in the region of $2,100. If ETH falls below this level before 7-Siblings can re-collateralize, then they will lose their collateral as the system liquidates the funds.

To understand the issue at stake, here's a brief background of how Maker vaults work. Maker’s dai (DAI) stablecoin is backed by crypto like ETH. When an investor deposits ETH to a Maker vault, they get DAI in return.

Because cryptos can suffer volatile price swings, the Maker protocol requires that all debt positions be over-collateralized. This means that deposits required to mint $1 worth of DAI might require up to $1.70 worth of the deposited crypto. This ratio is called the collateralization ratio.

Maker’s protocol requires this over-collateralization as suitable mitigation for price swings. It enables the DAI to maintain its stablecoin status even if crypto prices dip suddenly.

With ETH down about 10% over the last 24 hours to $2,435, 7-Siblings’ position is in danger of being liquidated. If that happens, the selling pressure could potentially trigger even more liquidations across other trading positions.

The last time things were in this position, 7-Siblings was able to remedy the situation, although they still lost about $60 million.