While everyone’s eyes were on cryptocurrency prices, the performance of decentralized stablecoins took a back seat. Especially for one individual, who nearly caused a $600 million Ether (ETH) liquidation on Friday.
The Maker Protocol and its decentralized stablecoin
Before we dive into what happened on January 21, 2022, or rather almost happened, some background is in order. One of the innovations of the ecosystem is the principle of decentralised stablecoin, notably initiated by the Maker protocol and its DAI. These are backed by a basket of crypto-assets, such as Ether (ETH) for example.
In simple terms, the Maker Protocol offers to borrow a certain amount of DAI by depositing ETH as collateral. For security reasons, the platform imposes a minimum collateral requirement of 170%. This means that in order to receive $1,000 of DAI, a minimum of $1,700 of ETH must be deposited.
The reason Maker imposes such high collateral rates on the loan is because of the volatility of the cryptocurrency market. This allows that if the price of the deposited cryptocurrency drops drastically, the protocol can still hedge to prevent its stablecoin from losing its dollar peg.
In the event that the collateralization ratio is no longer assured, the protocol notifies the user to deposit more Ether. If he fails to do so, then his collateral is liquidated – at a discount – to repay the loan. This discounted sale is a good deal for the buyers and for the protocol, which imposes a penalty on liquidation.
Historic cascade liquidation for DeFi
Now that you know how the protocol works, let’s take a look at the largest cascading liquidation in decentralised finance (DeFi), and how it could have turned into a catastrophe. On 21 January 2022, the price of Ether fell by about 18% in just a few hours, leading to the liquidation of several user positions. In total, $200 millionq in ETH was liquidated in this move.
However, it could have been much worse if one Maker user, named “7 Siblings”, had not reloaded his position in time to secure his collateralization ratio. Indeed, the forced sale of his Ethers by the protocol would have pulled the price down, making other users fall with him and forming a liquidation cascade that could have reached 600 million dollars.
An unprecedented situation that even forced Maker co-founder Rune Christensen to call out “7 Siblings” directly on his Twitter, asking him to “reload asap in the next 30 minutes”:
Maker is about to market dump $600 million worth of ETH unless someone can phone up this 7 Siblings guy and tell him to top up his vaults in the next 30 mins.
I’m confident the Dutch Auctions will hold up but not sure how the market will reacthttps://t.co/DPQzPQWLOY
– Rune (@RuneKek) January 21, 2022
After an initial liquidation of part of his position, to the tune of $65 million, someone finally managed to contact “7 Siblings”. The individual was able to make the necessary arrangements in time, saving the Aether from an even bigger drop.
This unusual event still allowed Maker to collect a good amount of liquidation penalty revenue and to print the most profitable day of his life. Regarding the value of its stablecoin, DAI, CoinGecko’s data showed that its price briefly fell to $0.96, before recovering very quickly. A testament to the resilience of the protocol
