A large drop in the price of ether (ETH) is testing the feasibility of Ethereum’s entire system of lending and borrowing.

MakerDAO is the largest and most important application in Ethereum’s decentralized finance (DeFi) ecosystem. Right now, it faces an emergency shutdown with $4 million of its dollar-pegged dai stablecoin not backed by an underlying crypto asset, according to a stakeholder call held Thursday.

If a shutdown were to occur, the crypto market would be flooded with some 2.4 million ETH even as the asset’s value plummets amid broader market turmoil.

A spokesperson for the MakerDAO Foundation told CoinDesk: “The MakerDAO community and the Maker Foundation have been working hand in hand to monitor, assess and resolve the current situation.”

The Maker protocol works by creating dai loans when users load ETH or Basic Attention Token (BAT) into the system as collateral. Maker then automatically sells that collateral when the market tanks in order to get DAI off the market until the system hits its 150 percent collateral target. But the price dropped too sharply for MakerDAO’s automated auctions to keep up.

Last night at 22:00 UTC, ETH was trading at approximately $194, according to CoinDesk’s Ethereum Price Index, only to fall to a low of $124 at about 12:44 UTC today.

The total dollar value of crypto locked in DeFi protocols has plummeted over 20 percent in USD terms overnight (from $889 million to $691 million, as of this writing) – this despite the fact that the total ETH in DeFi has actually increased some 200,000 ETH. The most likely driver: users with loans on Maker looking to boost their collateralization to head off a liquidation.

The MakerDAO Foundation and holders of the MKR governance token are trying to decide what to do right now. Options on the table include lowering the dai savings rate, extending the length of time for liquidation auctions and even triggering the emergency shutdown, effectively a system reboot of MakerDAO.

“We are in a brave new world here,” Rich Brown, the foundation’s head of community, said on the call, describing some of the complexities of an open format governance approach. “If we had a dictator just tell us what to do it’d be so much simpler.”

In an emergency shutdown, new CDPs are frozen, auctions finalize and remaining dai can be redeemed for ETH at a fixed price set at the time of the shutdown.

“If MakerDAO experiences an emergency shutdown, DAI becomes redeemable for the ether backing all of the DAI outstanding,” Robert Leshner, founder of DeFi protocol Compound Finance, told CoinDesk. “It stops behaving like a stablecoin and begins behaving like ether, price-wise. This will have unintended consequences for the entire ecosystem, some of which have planned for the possibility of this event, and others that have not.”

The MakerDAO community does not have a rule of thumb for a metric that would trigger an emergency shutdown.

“This certainly seems like a very rare ‘black swan‘ event,” Tom Bean, co-founder and CEO of trading platform bZx, told CoinDesk. “I don’t recall the last time things fell this hard and fast and caused this much congestion.”

What's next?

The Maker community is in the middle of a hot debate now.

As one community member who serves as a forum admin put it, “Ideally we’d already have emergency response procedures in place. We didn’t so we are figuring out what to do.”

The system’s first automated move is to keep putting new MKR into the market until the protocol can buy back 4 million dai. This will work so long as MKR’s value holds up enough in that time. The price is currently down 46 percent.

The community is also considering adjusting the two settings mentioned above (auction time and 0-dai bids).

There are also more complex moves that the community could make so that it takes both less capital and less technical skill to serve as a keeper. More people in the market should make it more likely for ETH to sell at a fair price in a liquidation, but of course the problem remains: Liquidation is profitable when liquidators get a discount on an asset that’s somewhat stable.

At this time, the mood inside the Maker forum is moving against the emergency shutdown because doing so would impose a cost on dai holders.

Dai holders would pay the cost because at the end of the shutdown, the leftover ETH would be worth less in total than the dai in U.S. dollar terms.

As Ryan Berckmans, a DeFi entrepreneur who is normally found in prediction markets, put it in a summary of today’s emergency call, “The social contract of MakerDAO is that MKR tokens take a haircut in the event of system failure.”

Issuing new MKR accomplishes this because it dilutes all the MKR holders, including large ones such as crypto investment funds Dragonfly, Paradigm and Andreessen Horowitz, among others.

Berckmans closed his summary with his personal perspective, writing:

“Keepers and MKR buyers should prepare for sustained high gas prices, and downward pressure on ETH and MKR. The Dow Jones hit sell-off circuit breakers three times in the past week and a half. It’s a historic week.”

Update (March 12, 21:54 UTC): This piece has been updated with more information about the MakerDAO system’s unexpected under-collateralization and a summary of the community’s discussion of its next steps.