MakerDAO, the largest decentralized finance protocol, has announced plans to liquidate heavily leveraged vaults to prevent excessive bad debt. They tweeted:
“Due to liquidations being previously disabled on the mentioned vault types, some positions accrued interest above their collateral value, resulting in being undercollateralized.”
They expect $1.5M worth of bad debts, which will be a ‘Negligible’ 2% of the current positive system surplus, so it is not a threat to their financial health. MakerDAO tweeted:
“The negligible DAI bad debt mentioned in this thread doesn’t represent any threat or deficiency to the Maker Protocol’s financial health, nor its solvency.”
MakerDAO is popular because borrowers use the facilities by depositing the same amount of collateral assets in the smart contracts, so it is an overcollateralized debt protocol, which is fundamentally strong and secure.
In November, the holders of MKR (governance token) voted for parameter changes that might result in the liquidation of USDP, GUSD, and USDC vaults that represent a collateralization ratio of less than 101%. The changes are expected after the Executive vote on November 30.
In a tweet, they announced:-
The changes are expected to be included in the next Executive Vote, which will take place on Wednesday, November 30th.
Once the Executive Vote is enacted by Maker Governance, the changes will be executed in the Maker Protocol, triggering the respective liquidations.
— Maker (@MakerDAO) November 23, 2022
Crypto experts believe that this liquidation is a significant step from the Maker team because it can be a serious threat if it becomes excessive over the positive system surplus.
This liquidation is more significant because it was announced just after the FTX liquidity crunch, which questions the sustainability of these decentralized digital assets. MakerDAO deals in decentralized finance, so they have bigger concerns about sustainability. This step represents the focus and transparency of this protocol that helps to attract more users in the long term.
Though the US House Financial committee will hold a hearing about the FTX fiasco in December 2022, the crisis has pointed out how over-leverage of such volatile assets can disrupt the entire ecosystem. The decentralized network industry is at an early stage of a bigger revolution.
Thus, it is a lesson for all decentralized finance networks that such a liquidity crisis can be detected much earlier by reviewing and controlling the colorizations and liquidity in the system. MakerDAO is taking such a step to secure its network. Besides liquidations, MakerDAO will clear the falsely accrued interest from the protocol.