MakerDAO, aka Maker, the creator of DAI - created two digital assets for the Maker infrastructure, a digital ecosystem for cryptocurrency investing and commerce. The two digital assets created by Maker are the MKR token (which serves as the infrastructure's governance token), and the DAI stablecoin. The value of DAI is tied to the value of the US dollar (USD) at a rate of 1:1, with the exchange rate managed through a smart contract-based system of "Oracles," which respond to market dynamics.
Creating a DAI token
DAI is created against the deposit of Ether in a multi-step process which is referred to as "opening a Vault." First, a customer goes to Oasis, a trading and borrowing platform for DAI. The customer selects "borrow," and then chooses a wallet to store their digital assets. The customer has to put down collateral - usually Ether, but the customer can also use USDC, TrueUSD, or wrapped bitcoin (WBTC). The amount of collateral the customer puts down determines how much DAI they can receive. This process involves fees that may change from time to time. Since DAI is tied to USD, if the customer uses Ether as collateral, they can potentially profit if the value of Ether goes up. If it goes down, the customer may become indebted. Oasis maintains a metric called "Liquidation Price" on each customer's user interface; if the Liquidation Price exceeds the customer's collateral price (or "Current Price" as it's displayed in the menu for generating DAI), the user's account may be liquidated. They can avoid this by paying out DAI debt, including fees, or depositing more collateral.
Once the customer has DAI, they can use it to buy Ether to deposit back into their Vault - thereby leveraging their initial stake, or they can spend it at electronic merchants and other services that have integrated into the DAI ecosystem and accept DAI tokens as payment.
ETH crash causes mass liquidations
On March 12-13, 2020, the price of Ether fell. Although the Maker protocol theoretically adjusts ETH-USD prices based on market prices, the price didn't get updated in time, resulting in many users winning auction with 0 DAI bids. This disrupted the protocol, allowing some to take advantage of the price discrepancies while others found their Vault stakes liquidated.
Between March 19 and March 28, the Maker Foundation held a series of digital token auctions to cover $4.5 million worth of undercapitalized debt created on March 12, when liquidators won collateral liquidation auctions with 0 DAI. The crypto firm Paradigm won 68 percent of the auctions, gaining over 14,000 MKR tokens.
A lawsuit was filed against the Maker Foundation in April, alleging that the Foundation misrepresented the risks of using the protocol to its users.
In September, MKR token holders voted 2 to 1 to not compensate Vault holders who suffered losses due to liquidations caused by the crash. 38 MKR holders participated in the governance vote that led to this decision. These MKR holders were disincentivized to vote for compensation because it would have required printing more MKR tokens, which would have diluted the value of their holdings. Some members on Maker's forums decried Maker as a scam due to the outcome, and others expressed similar sentiment due to the decision being decided by a relatively small number of MKR whales.
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- A Conversation with MakerDAO’s “Head of Oracles” - Mariano Conti. Medium.
- How to Open a Maker Vault. MakerDAO.
- You’ve Learned How to Open a Maker Vault––Now What?. MakerDAO.
- MKR auctions conclude with crypto venture firm Paradigm emerging as the biggest winner. The Block.
- MakerDAO won't compensate Vaults affected by liquidations during the March market crash. The Block.
- MakerDAO Users Hosed by March Flash Crash Won't Get MKR Payouts, Say MKR Whales. Coindesk.
- Vault Compensation Plan V2. Maker Foundation Forums.