【Full Text of MakerDAO Blog】Market Crash on March 12-13, 2020: How it Impacted MakerDAO

This article is translated from the original "The Market Collapse of March 12-13, 2020: How It Impacted MakerDAO" from MakerDAO's blog on April 1st. If there is any discrepancy, please refer to the original text.

Approximately three weeks ago, the Maker Protocol and Maker governance community were tested by a severe downturn in capital and crypto markets. Maker Governance (MKR holders of the governance system) came together in this near-perfect external storm to assess and manage the Maker system in a truly decentralized manner.

The following information provides background on the market events and details the impact on Maker, the rapid response of Maker Governance, and the valuable insights gleaned from the experience.

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Background of the Market Crash

Due to the uncertainties surrounding the novel coronavirus and the outbreak of an oil price war, the capital markets began a severe downturn around February 20th. The plunge eventually escalated into a 36-hour complete collapse of both the capital and cryptocurrency markets on March 12th to 13th.

This crash wiped out over 50% of the value from ETH, BTC, and the entire cryptocurrency market. Trading activities on the Ethereum blockchain surged, leading to network congestion and a significant spike in Gas prices.

Impact on MakerDAO

Network congestion and high Gas prices resulted in transaction delays and cases of malfunctions. Due to these issues, coupled with an unprecedented drop in asset values, Maker Vault owners, Keepers, and the liquidity pool were caught off guard. Oracles, the pricing data sources for collateral, though functional, also experienced delays like everyone else. This triggered a large number of auctions, with some bidders submitting bids above zero ("zero-bid bidders").

Struggles of Vault Owners

For a period, Vault owners attempted to add more collateral or repay Dai but were hindered by high Gas prices and transaction delays.

Struggles of Keepers

Keepers also faced numerous obstacles. During the market crash event, four Keepers operated multiple bots. Some Keeper bots struggled to obtain Dai liquidity quickly, while others could not participate in all auctions.

Liquid Keepers faced unprecedented auction conditions. Although they were able to participate in auctions, their liquidity quickly depleted, leaving them with barely enough time to cycle collateral back to Dai to participate in other auctions.

The Maker Foundation operated a Keeper bot, which encountered technical issues due to extreme network congestion during the auction activity, affecting its bidding ability for several hours. Two other Keepers began submitting zero-bid bids, while the remaining Keepers eventually ran out of Dai liquidity and were unable to bid for hours until they acquired more Dai.

Exchanges' Struggles

Due to the sharp decline in the crypto market, coupled with previous Dai market activity, Dai liquidity was significantly impacted. This resulted in exchanges, especially centralized ones, struggling to have real liquidity. Despite this, centralized exchanges also faced network congestion and delays in asset movements between Keepers, making it difficult to access liquidity.

Struggles of Dai

The entire ecosystem experienced a severe shortage of Dai on March 12th, making it challenging to maintain its soft peg to the US dollar. Demand for Dai had been increasing before March 12th and intensified on that day due to market influences. For example, according to Coinbase via TradingView data, at some point on March 12th, the trading price for Dai reached as high as $1.126447.

Collateral Auctions

Oracles, like everyone else on the network, experienced delays, leading to missed price updates.

From the perspective of Vault owners, this impact had a positive aspect. It provided them with more time to add collateral or purchase Dai to return to the Vault. Additionally, delayed Oracle pricing provided Keepers with more time to access liquidity and prepare for subsequent auctions.

With the unprecedented drop in collateral values, approximately 1,200 Vaults were put up for auction. Due to network congestion and a lack of liquidity, Keepers did not have enough Dai or the ability to participate in all 4,447 triggered auctions. As a result, under normal market conditions, zero-bid bids would not have disrupted as expected, leading many zero-bid bidders to win auctions. It wasn't until Keepers regained liquidity, increased inventory capacity, and resolved network congestion issues that zero-bid bids were successfully prevented, restoring a competitive auction space.

Given these events, some speculate that zero-bid bids were the result of a coordinated attack on the system or a system hack. Currently, there is not enough evidence to support or assert this claim.

Summarizing the above:

• During the market collapse, approximately four Keepers operating multiple "bots" were active.
• The Maker Foundation controlled a Keeper bot, which encountered technical issues due to extreme network congestion during the market collapse.
• During this period, two Keepers submitted many zero-bid bids.
• Other Keepers eventually ran out of Dai liquidity and could not bid for hours until they acquired more Dai, hence unable to bid immediately.
• Currently, there is not enough evidence to clearly indicate whether zero-bid bids were a result of an attack or a hacker.

Maker Governance's Response

The Maker Protocol is transparent and publicly accessible. Inherited from the Ethereum mainnet, these characteristics allow the community and Maker Governance to swiftly identify specific events and respond decisively.

Implementation of Decentralized Governance

The community quickly gathered on the Maker Governance forum and Rocket.chat to discuss these events and how to best respond. MKR holders first responded through an executive vote to temporarily adjust auction parameters to better match Ethereum blockchain's operational capabilities.

Subsequently, voting was conducted to adjust risk parameters to handle situations where Dai exceeds the target rate (1 USD). Maker Governance then proposed adding collateral types unrelated to the cryptocurrency market to provide diversification and advanced sources of liquidity. Finally, based on the results of the executive vote, USDC was added as a collateral type.

MKR Debt Auctions

The zero-bid events on March 12th to 13th led to a shortfall in collateral auctions, totaling around approximately 5.4 million Dai. According to the Maker Protocol's design, MKR holders can compensate for these shortfalls by diluting MKR. If Vaults are publicly auctioned, and collateral auctions fail to raise enough Dai to cover the unredeemed Dai in the Vault, the Maker Protocol will automatically create MKR through debt auctions to dilute the value of MKR. This risk encourages MKR holders to govern responsibly.

As a result, the Maker Protocol created and completed a series of MKR debt auctions to replenish the system's capital. As of March 29th, 20,980 MKR was auctioned for 5.3 million Dai.

Liquidation of Vaults

Approximately 1,200 Maker Vaults with insufficient collateral were subsequently liquidated. As mentioned above, the Maker community is currently discussing zero-bid bids and their impact on liquidations. It will ultimately decide how to address the issue of liquidated Vaults. We encourage everyone to follow this discussion on the governance forum and engage in conversations on various Maker social media platforms.

Summarizing the above:

• Maker Governance swiftly took action by voting on adjustments, changes, and additions to "debt auction" parameters.
• The community quickly rolled out further analytical tools for observers to optimally track system repairs and changes. Refer to changelog.
• The zero-bid events on March 12th to 13th led to a shortfall in collateral auctions, totaling approximately 5.4 million Dai.
• Approximately 1,200 Maker Vaults with insufficient collateral were subsequently liquidated. As mentioned above, the Maker community is currently discussing zero-bid bids and their impact on liquidations.

Insights and Lessons Learned

Maker Governance was tested for resilience in the face of challenging external storms using clear, structured system processes. The good news is that Maker Governance acted swiftly and decisively and has confidence in the system's operation. The community and system emerged stronger from this experience. Here's what we've learned:

• A diversified collateral asset portfolio will reduce the impact of severe market events on the system. The Maker Foundation believes that prioritizing real-world assets and centralized crypto assets as collateral is crucial to providing substantial diversification and liquidity sources for the system. Centralized assets do not centralize the protocol itself.
• Most importantly, governance processes must remain clear and structured but have enough flexibility to meet evolving system needs (e.g., the ability to quickly enable new collateral types and change risk and auction parameters). The process also relies on community participation and collaboration.
• The MakerDAO system has enhanced risk management from Vault holders, increased participation and decision-making capabilities from Maker Governance, increased participation from Keepers, and created new liquidity sources from Dai holders. These valuable contributions strengthen the system for positive assistance in the future.
• The rapid market downturn events highlighted certain limitations of the Keeper ecosystem. To progress, further development and improvement of the Keeper role are necessary. The community (including Keepers and potential Keepers) and Maker Governance must consider and address issues related to Keeper operation infrastructure and policy implementation to make the Keeper ecosystem stronger and more diversified.
• Diversified external sources of liquidity are needed; the ecosystem cannot rely solely on one or two centralized exchanges. Ensuring and enabling other non-native liquidity channels is crucial.
• The Maker community successfully dealt with a very dire situation, proving to be one of the most passionate and dedicated communities in the crypto space.

Next Steps for the Foundation

The goal of the Maker Foundation is to guide MakerDAO, ensuring the growth and stability of the Maker ecosystem. The Foundation is committed to the following priorities to develop and strengthen the DAO and promote fully decentralized governance:

• Further empower the community to continue focusing on the core governance objectives, especially the processes needed to maintain the health and security of the Maker Protocol and the MakerDAO ecosystem.
• Cultivate a self-sustaining MakerDAO where the community manages all processes, frameworks, and personnel, including the introduction of collateral, Maker Improvement Proposals (MIPs), and Elected Paid Contributors (EPC).
• Provide guidance for the entire liquidation structure, including Keeper ecosystem development and auction dynamics.
• Offer guidance on Oracles, liquidation freeze tools, emergency shutdown processes, and redeployment.
• As the Foundation progresses towards its ultimate goal, continue the steps mentioned above: fully decentralize MakerDAO and dissolve the Foundation.

If you are an MKR holder or planning to become one, please read the Awesome MakerDAO guide on "Getting Started as a Voter" and "Governance and Risk Overview" for more information on participating in Maker governance.