MakerDao (MKR) has published a new report that attempts to put the events of ‘Black Thursday’ into context — and recommends safeguards to ensure it can never happen again.

On March 12-13 a roughly 50% crash in the price of Ethereum (ETH) led to the under-collateralization of the debt positions underpinning Maker’s Dai (DAI) stablecoin.

The document, which was authored by ‘MakerMan’, said the crash drove liquidations that “effectively swamped” the system’s liquidators.

With the ETH network suffering from congestion, users were unable to participate in auctions, resulting in a single bidder winning nearly 62,843 ETH for virtually zero DAI across 1,461 auctions.

$6.65 million in losses

In total, the author estimates that the auctions resulted in the Maker system becoming undercollateralized by 6.65 million DAI. The document said there were intangible costs too:

“This event was not only costly to vault holders, but was to the Maker system as well, in capital costs, system confidence and Maker reputation generally.”

The report notes that when additional keepers were able to participate in bids, prices offered between 10% and 14% collateral returns.

MakerDAO recapitalized through debt auctions

MakerDAO is the decentralized finance (DeFi) protocol that creates the stablecoin DAI.

Dai are created when users take on collateralized debt positions — where collateral (often Ether) is deposited in an Ethereum smart-contract, and a portion of the locked assets’ value is represented by newly created DAI.

The collateral is also used to drive the stabilization of Dai’s value, with the system incentivizing the creation or destruction of Dai depending on whether DAI’s price is above or below $1. Loans that can no longer be supported by their collateral enter into liquidation proceedings — where the loan’s collateral is auctioned in exchange for Dai.

In response to the crisis, MakerDAO entered into a new series of debt auctions — where new MKR tokens are created and auctioned for DAI in order to recapitalize the system.

Over 5 million DAI were raised in the auctions, with venture fund Paradigm Capital winning 68% of auctioned MKR

Making changes to prevent future failures

Maker’s report identifies several key changes that have been made to the Maker system in order to prevent comparable crises for the protocol in the future.

MakerDAO’s governance now has the ability to “instantly halt the auction system and hence liquidations” to prevent the sale of collateralized debt positions for 0 DAI.

Additional changes have also been made to the auction system’s parameters, including the addition of stablecoin USD Coin (USDC). The Maker community has also created web interfaces to increase participation in auctions.

The report also recommends introducing safeguards to restart auctions that have less than three bids and two unique bidders, placing a limit of no more than 50 ETH batches per auction lot, and the creation of a Maker liquidation dashboard.