On March 12th, Ethereum prices crashed from $191 to $88. In the ensuing chaos, the MakerDAO system backing DAI was unable to perform liquidations properly. About $8 million worth of ETH was taken from the system in what came to be known as “Black Thursday”.

DAI drifted wildly from its 1USD peg in the market volatility. It was unclear whether DAI was safe to use, or if it would even survive the event.

Soon after, MakerDAO quickly made emergency adjustments to the protocol, and did an auction to try to save the protocol. Was it enough?

What Happened?

On March 12th, stress from the coronavirus hit stock markets, causing them to experience their worst drop since 1987. Crypto markets also fell. The price of ETH dropped precipitously from $191 to around $88 dollars. The Ethereum network was overwhelmed with transactional activity and gas prices skyrocketed.

Transactions using normal amounts of gas couldn't make it through, preventing systems like Maker’s price oracles from functioning properly When the oracles did finally update with a much lower price of ETH, they triggered a massive wave of liquidations.

MakerDAO liquidations happen through auctions. In these auctions, bundles of ETH collateral are sold, at a 3% discount, for DAI. With an incredible amount of auctions happening at once and gas prices abnormally high, auctions were finishing without any successful bids. Attackers who saw this were able to submit 0 DAI bids and win auctions of 50 ETH while paying nothing but gas fees. These attack left MakerDAO with a $5.4 million collateral shortfall (relative to the required 150% collateral ratio).

It’s important to note that while the value of Ether backing DAI dropped below the 150% collateral requirement, it was still far above 100%. In the most literal sense of DAI being backed by at least $1 worth of ETH, DAI never became undercollateralized.

MakerDAO Governance Sprung into Action

As soon as the events occurred, MakerDAO’s governance sprang into action to reduce the chance of another Black Thursday. Over the course of March, these are some of the notable adjustments made to the MakerDAO protocol:

Auction time lengthened from 10 minutes to 6 hours.

During Black Thursday, a massive wave of auctions happened and ended before liquidations could properly take place. By increasing auction time, it gives more time for liquidators to get DAI and participate in auctions properly regardless of network conditions.

Stability fee Reduced to 0.5%

Stability fee is the interest rate that people who mint DAI pay until they return the DAI loan. By lowering the stability fee, it makes it cheaper to create DAI. The result is that more people will mint DAI and there will be more DAI in circulation, improving liquidity and helping DAI return to its $1 peg.

DSR reduced/eliminated

DSR was a big draw for new users to onboard DAI, but it also made DAI illiquid. DAI locked up in the DSR was DAI that was not available to be bought on secondary markets. By eliminating DSR, MKR holders are maximizing the amount of DAI liquidity.

USDC added as a collateral

As an emergency measure, MKR holders voted in USDC as collateral. This sounds very strange at first but actually has a number of benefits:

A non-volatile collateral allows liquidators to have easy access to DAI at a reasonable price even in times of extreme market conditions.

DAI can be peg-arbitraged by USDC. USDC holders who believe DAI will drift back to its $1 peg can mint DAI while it is worth > $1 USD, sell for USDC, and then buy back DAI at a lower price in the future.

Governance Security Module delay reduced from 24hr to 4hr

Last December, MakerDAO implemented a Governance delay of 24 hour meant to address malicious attacks. Any malicious executive proposal would have 24 hours to be reviewed by the community before it goes into effect.

While the 24 hour delay is good in the face of a malicious attack, it also means that benevolent actions are subject to the same delay. In light of Black Thursday, MKR holders voted to reduce the delay to 4 hours so they could react more quickly in the case of a black swan event.

Liquidation Freeze Module introduced

One major issue on Black Thursday was the massive wave of liquidations which occurred in an extremely short amount of time. This didn’t give liquidators enough time to get enough DAI and participate in the liquidation auctions properly.

The Liquidation Freeze Module allows MKR holders to freeze liquidation auctions temporarily to allow liquidators to recycle their DAI, allowing them enough liquidity and time to participate in all auctions. Importantly, this module is not subject to the 4 hour time delay of the Governance Security Module.

MKR Auction

Similarly to how liquidation auctions for ETH occur for individual vaults when collateral falls below 150%, the MakerDAO is designed to have Debt auctions for MKR when the system falls below 150%.

Following Black Thursday, MKR was minted(diluting the value of existing MKR) and sold via a series of MKR auctions to cover the collateral lost. 20,980 MKR was auctioned for 5.3M DAI, covering the collateral shortfall from Black Thursday.

Is MakerDAO Still Safe to Use?

There is no guarantee that another Black Thursday won’t occur. But if it does happen again, MakerDAO should fare much better because of the actions taken in March.

While DAI supply is smaller than before the event, it is more liquid because there is no DSR to lock up DAI. Auction times are much longer than before, meaning liquidators have much more time to obtain DAI. The Liquidation Freeze Module even allows for MKR holders to manually freeze the liquidation process if network conditions prevent liquidations from happening successfully.

It’s important to understand that DAI never became undercollateralized below $1 USD. Even with ETH collateral falling below the 150% requirement, it was still far above the 100% needed to keep DAI fully backed by at least $1USD of collateral.

It’s equally important to realize that the scenario of MakerDAO falling under 150% collateral, while not ideal, was planned for in the MakerDAO protocol. Debt auctions are a built-in mechanism where the system can auction off minted MKR to cover collateral shortages.

There’s no telling what the future holds. As MakerDAO shifts to decentralized governance, it’s possible that any or all of the parameters above may change. But for now, it seems that Black Thursday didn’t kill MakerDAO, it made it stronger.

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Disclaimer: I am not a financial analyst. This is not financial advice.