Hello Defiers! In today’s issue:

An interview with one of the MakerDAO collateral owners who got 100% liquidated

Andre Cronje builds tool to make Aave loans liquidations easy

Tim Draper is investing in DeFi

“I Feel Betrayed,” Says MakerDAO User After Losing $50K

The biggest losers of MakerDAO’s black Thursday are arguably Dai borrowers who got their entire collateral —about $5 million worth of ether— liquidated as ether plunged. While the DeFi community has come together to make sure there’s a buyer of last resort for MKR, somewhat limiting MKR token holders’ losses, there hasn’t been a decision on how and if collateral holders who lost 100% of their funds will be compensated.

Issuers of Dai loans on MakerDAO are usually sophisticated traders, aware that they were dealing with a risky system. Still, MakerDAO documentation had led them to believe the penalty for being liquidated was 13% of collateral. But last Thursday they lost all of it. Without much recourse, they’ve turned to MakerDAO’s forum to commiserate, while members of the MakerDAO team have said it’s up to the system’s governance to decide what to do about their losses, and that while they’re aware a decision has to be made, they’re not the priority at the moment.

MakerDAO team member who goes by the name LongForWisdom said in a forum:

“It’s pretty hard for us to make binding commitments as a DAO given that it’s a community made up of many people with differing views. About the best I can offer is to say that nearly everyone I’ve spoken to about it is open to having a discussion regarding compensation. […] I’m fully expecting all of you to scream bloody murder if it does look like we are sweeping it under the rug. But yeah, give us a few weeks, let us sort out our other more immediate problems then we will have that discussion.”

Below is an interview with one of the vault owners who got liquidated. He’s an 35 year old accountant who goes by the pseudonym Sandhaai, is based in South Africa, and has worked as a performance analyst for multinationals. He got into crypto in Sept. 2016 and understands DeFi mechanics from a financial point of view, but is not a coder so he “took the product at face value.” For that, he got badly burned and wouldn’t use MakerDAO again.

Camila Russo: When did you decide to open this CDP? What prompted you to do it?

Sandhaai: I was looking for a way to effect low-level leverage on my crypto holdings

CR: About the CDP: Is it the only one you've opened, for how much was it, and what did you use the Dai for?

SH: Yes, I only opened one. At one stage up to 70k USD. When liquidated it was around 50k USD. I used some for trading – mostly for re-investing in crypto.

CR: Have you been at risk of getting liquidated before?

SH: Not like this. Under normal circumstances you have the ability to adjust collateral before you are liquidated.

CR: What was your first reaction when ETH started diving last week? Did you take steps to save your loan/collateral?

SH: I lowered my leverage by buying back DAI. I was OK on the Wednesday before, but did not anticipate the dive to 70 USD.

CR: Can you talk about the moment when you saw the collateral was gone? How did you find out, what was your first reaction, etc.

SH: The evening before I tried to get transactions through to lower the risk. One transaction was still pending through the evening. The morning I woke up and checked where my position is at. It was terrible. It took a while for me to check the price and make peace with the fact that I had been liquidated, but I couldn’t really understand why my balance was zero and why I did not get some ETH back after the loan was sold. Only later on message boards could I see what actually happened.

CR: Do you think you were adequately informed of this risk?

SH: No. I consider myself a pretty advanced crypto user for where we are at the moment especially if you factor in my finance background in this finance/crypto product.I took the product at face value as advertised – it’s marketed as a retail product with a smooth interface etc.

I feel betrayed if the Maker community will now turn around and say I should have audited the code or read the fineprint if I wanted to use their product. If that is the case and the product is only for experts it should be advertised as such. Did you read the fineprint for your last iPhone purchase? Last Amazon purchase? The 13% liquidation etc. was clear enough – I have no issue with that, but the average user should be protected if Maker is ever thinking about wide adoption.

I will be an active critic until this is the case because at the moment their customers (CDP holders) are onboarding a massive amount of additional non-obvious risk without being reasonably informed and that stinks – it’s not the decentralized future we’re hoping for and smells like normal corporate blame-shifting and their reputation is suffering for it.

CR: What's the general mood among liquidated vault owners in different forums and social media?

SH: In one word – betrayed. This you can see from the forums. The discourse is surprisingly mature, but you can see people got hurt. We are the platform’s customers and we are picking up the tab for “sorting out the bugs” with our life savings – who would want to take part in that?! This while the Maker holders have limited skin in the game.

CR: What's your opinion of Maker's answer to CDP holders so far? What would you like Maker to do?

SH: So far I’ve not seen an official response except bailing out the other side of the transaction (the 4m USD). @MakerMan has raised the issue on the Maker forum for which I feel thankful. The issue should be addressed – not swept under the carpet.

Maker ecosystem should make whole the CDP holders that got liquidated with a zero bid (21% collateral or whatever) – it should be seen as a cost of development & looking after loyal supporters.

DeFi is built on principle and this is a principle issue – we’re building this ecosystem together and we can’t let some take the hit for negative effects. Basically the same reasoning that drove them to bail out the depositors with a MKR issue. Everyone is taking part there – Dharma and all the rest – how are the CDP holders position different? Why are we left in the cold? It’s also for the brand/long term viability of the platform.

CR: Some will argue that vault owners getting 100% liquidated is the cost of doing business in such a risky space. What are your thoughts on that view?

SH: Well.... there’s product risk and there’s platform risk. Product risk we all accept - Vault owners getting 66% liquidated is cost of doing business in such a risky product.

Platform risk is something different and that’s on the shoulders of the platform developers/managers.

If I drink Coke and I get fat and get a heart attack, well, that’s a risk I take. I don’t, as a Coke drinker, onboard the risk for a factory process that leaves a piece of a thumb in my can...even if you have some disclaimer in the fineprint and I should have done a factory tour to see the workers with long thumbs on the floor.

Then if we’re saying this is DeFi and product users are also taking on platform risk & Maker holders in this analogy don’t then it’s a crazy crazy product with a skewed risk/reward weighting.

CR: Would you borrow Dai on Maker again? If no, what would have to change?

SH: I won’t. How would I know what other risks I’m taking on without being an absolute expert?! I don’t want to take on product risk & platform risk – that’s too much!

CR: Are vault owners considering legal action?

SH: I think there may be enough energy for it, but that isn’t anyone’s first option.

CR: Has your opinion of DeFi changed after this?

SH: It has. I’ve now been burnt as an early adopter while the platform owners rake it in – feels like any other ICO scam. I think it has promise for the future, but the risk/reward for a user at this point seems skewed to those with a stake in the platform, so it’s probably better to stay out.

Developer Builds Tool to Make Aave Liquidations Easy

One of the reasons MakerDAO’s system broke down last week was because of lack of competition from liquidators (traders/bots buying up collateral and paying off underwater loans for a fee). iEarn Finance founder Andre Cronje built an interface to make it easy to liquidate loans on lending platform Aave. The tool uses flash loans, which allow traders to borrow without putting up any collateral, which means traders don’t need initial capital to profit from liquidations. [Corrected from previous version which said Andre Cronje was the founder of Curve Finance.]

Billionaire Bitcoin Bull Tim Draper Investing in DeFi

Billionaire bitcoin bull Tim Draper’s Draper Goren Holm Ventures is investing in DeFi Money Markets DAO (DMM DAO) in the form of DMG — the soon-to-be-released governance token that will run the DMM DAO, according to the DMM Foundation’s announcement.

Smart Money’s Jonathan Joseph writes about headlines that say latest developments show DeFi isn’t ready for prime time. “Perhaps the headline should be just how well DeFi held up under the kind of stress test that only comes once every few decades, as well as how quickly the ecosystem is adapting and becoming anti fragile.”

Ashwin Ramachandran of Dragonfly Capital on last week’s marker crisis: Despite the $5 million shortfall in MakerDAO, DeFi was able to handle record liquidations and activity in a congested Ethereum network quite well in a context where many expected it would have completely collapsed.

Gavin McDermott of IDEO has a little fun with the latest stimulus announcements from central banks.

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About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.