Decentralized finance (DeFi) credit facility, MakerDAO, will begin a MKR governance token auction in two days, the first time such an event has happened in the protocol's history.
The MKR auction, known as the Debt Auction, was triggered after the systemwide under-collateralized debt reached over $4 million. The auction will programmatically mint and sell MKR tokens in 50,000 DAI increments and use the funds raised to cover outstanding bad debt.
MakerDAO borrowers mint stablecoin DAI, which has a soft peg to the dollar, by depositing ETH and BAT as collateral. However, earlier today, due to the ETH price crash, a large volume of loans dropped below their collateralization threshold, triggering liquidation proceedings.
Liquidation events on MakerDAO proceed in the form of Collateral Auction. Users can compete to receive the ETH collateral by bidding in DAI. Winners of the auction receive a minimum 3% price discount on collateral. While the aim of this auction is to raise DAI to cover the outstanding debt, today, some liquidators were able to win the auction with 0 DAI bid due to a total lack of competition.
"Some vaults were liquidated with 0 DAI coming back in the system, resulting in a net loss for the system. The MakerDAO had a +500k$ surplus before the price drop and now has a -4M$ surplus that needs to be filled," a MakerDAO community member summarized.
As Gauntlet Networks CEO Tarun Chitra explained to The Block, the lack of competition is due to the Ethereum network's high gas fees.
The Ethereum network was experiencing congestion today as transaction volume spiked due to market volatility. As a result, the gas fee, which is the amount of Ether a user is willing to pay to complete one transaction, also surged along with validation time for each transaction.
According to The Block's research analyst, Matteo Leibowitz, liquidator bots were not correctly set to accommodate the significant spike in gas prices, with most designed to set gas prices according to the 50th percentile of existing transactions in the Ethereum mempool. As a result, the transactions emanating from these bots were not validated in time to participate in the auction, allowing a single liquidator to win with a 0 DAI bid.
"Congratulations to the lucky 0 DAI bidder. Now that liquidators are aware of their mistakes, I expect future Collateral Auctions to remain competitive," Leibowitz added.
MKR holders are still discussing solutions to stop 0 DAI bidding, including increasing the initial bid price and auction duration for Collateral Auctions. It is unclear what the next steps are for MakerDAO at press time.
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