The possibility of an emergency shutdown looms over the MakerDAO (MKR) system, a popular Ethereum-based crypto lending platform. Following the crypto meltdown, US$4 million [$AU6.5 million] worth of DAI, its US dollar-pegged stablecoin, has become undercollateralized.
On March 12, the MKR community began a call to discuss the opinion of stakeholders on an appropriate response to the current situation.
ETH price crashes, gas prices increased
This move follows the Ethereum price crash that resulted in the undercollateralization of vaults that hold custody over collateralized ETH. Many vaults became open for liquidation.
Later on, traffic accumulated in the Ethereum network. Due to the massive number of broadcasted requests, gas prices went up.
Keepers in the MKR ecosystem had no choice but to stop the broadcast of activities, fearing price slippage and longer transaction settlement times. Moreover, MKR apparently did not have enough liquidity to complete all liquidation requests.
Emergency shutdown as an option
The last option is to implement an emergency shutdown. According to Ryan Berckmans, an Ethereum developer who posted his response to the call:
“An emergency shutdown (not happening now) would cause DAI holders to take a haircut, whereas the social contract of MakerDAO is that MKR tokens take a haircut in the event of system failure. Therefore we should try and ensure that MKR holders take a hair cut by avoiding emergency shutdown if possible. I heard that emergency shutdown is not being considered as an immediate option.”
Others believe that a decision to declare a shutdown might be reasonable and necessary if ETH continues its free-fall towards $80 or below.
What should borrowers and lenders prepare for?
Berckmans warns that “keepers and MKR buyers should prepare for sustained high gas prices, and downward pressure on ETH and MKR.”
He added that “the Dow Jones hit sell-off circuit breakers three times in the past week and a half. It’s a historic week. We should plan for global markets to potentially crash further which may correlate with further crypto drops.”
Berckmans further advised that for those who wanted to help with the issue, the best way to “donate” is to bid on the upcoming MKR system auctions.
MKR to inject new MKRs in the market
Right now, there is a total of $4 million worth of bad loans in the system. Other options they are left with are to lower the DAI savings rate or extend the settlement period for liquidation auctions.
MKR’s latest response has only been what was automated. They are injecting new MKRs in the market to cover enough to buy the $4 million DAI back. However, MKR’s price is also in a free-fall.
No safe haven, due diligence advised
If we have learned anything from this event, it is this: nothing can be a safe haven for now. It is especially true with how things are going on with the crypto market. It is only due diligence that will save crypto-holders from the stress of putting their assets on risky ventures.