Maker Liquidation Victims Fight for Compensation

By March 22, 2020 Ethereum
Click here to view original web page at defirate.com

As many of us know, Maker – the sector leading lending platform – suffered a mass liquidation event this past week in what many have come to call “Black Thursday”.

For those unaware of what happened, dozens of Vault holders had their positions liquidated due to severe price volatility of Ether, ultimately resulting in the forfeiture of the underlying collateral.

Now, instead of these Vault holders losing a fraction of their collateral minus the 13% liquidation fee, the subsequent Keeper auctions resulted in them losing 100% of their collateral, with no real indication as to why this happened.

Since then, we’ve seen Maker host an MKR auction to raise DAI in order to recapitalize the system. Paired with the creation of the Maker Backstop Syndicate, the auctions have run quite smoothly, with 2M Dai being raised at the time of writing.

We're currently updating https://t.co/bs0usu1gXo with metrics for the ongoing @MakerDAO MKR Debt Auction. Already nice stats for you to look at More visual charts incoming pic.twitter.com/76oSJeweQ9

However, while the auctions are running smoothly, there has been little to no communication from Maker on how they will be addressing those who suffered 100% liquidation.

Nexus Mutual to the Rescue?

For those who follow our reports, you may recall Nexus Mutual – a product which offers smart contract covers – paying out claims on behalf of the bZx exploits roughly a month ago.

Recent events led to us paying our first and second ever claims on Nexus Mutual!

With this, many chose to submit claims to the mutual on behalf of the recent situation with Maker, hopefully looking to be compensated for lost collateral.

However, the subsequent Claims Assessment came to a different conclusion. As shared in Nexus’s most recent community update, the mutual decided not to reimburse those who submitted claims on behalf of the Maker event. In summary:

  • All 16 claims raised were rejected.
  • In total 99.96% of votes rejected claims and 0.04% accepted
  • $2,218,270 was staked to decline.
  • $786 was staked to accept.

Without going too deep into the different angles mutual members stated, it was unclear whether or not smart contracts were actually exploited or if they were being used for an unintended reason. Furthermore, it’s difficult for Nexus to know whether or not those who submitted claims were actually someone who lost collateral in the mass liquidation. Throughout this process, Nexus was able to use this experiment to modify its resolution process as follows:

  • Change the current time limits on claims voting to include voting velocity period, minimum vote period and max vote periods.
  • Change the cover wording document to be more explicit and remove ambiguity around certain issues.

Hugh Karp, CEO of Nexus, instead encouraged those who were affected to consider alternative means for compensation – which is what we’ll dive into now.

Liquidation Victims

During this entire process, those who were affected by the liquidations have banded together in this Telegram chat – effectively organizing a Class Action lawsuit against the Maker Foundation in light of recent events. Here’s the pinned message which summaries the initiative.

The aforementioned spreadsheet – found here – currently has 45 different “victims” all accounted for to various degrees. While the initiative is still ongoing, we’re hopeful that Maker will address the situation themselves following the completion of the MKR auctions.

Patricio Worthwalter, an avid member of the Ethereum community added the following:

“From what I read on the forums and heard on the calls, Maker is open to compensating those wrongfully liquidated that can prove with on-chain data how much money they lost, but the victims are too busy planning a class action suit. This might make sense anyways but if Maker is keeping a door open they should explore that as well. (The victims) don’t know this certainly because Maker governance is too hard to penetrate if you aren’t an expert”

DeFi’s Path to Maturity

The last comment paints a pretty strong picture of the current state of the industry. As mentioned, the existing governance process is more or less impossible for a new user to navigate. In certain cases, many user’s first experiences with DeFi having 100% of their collateral lost is a pretty sour event.

One of my friends from high school recently purchased $ETH

I was eager to show him about #DeFi so I put together some videos on how to open a Vault using @MakerDAO and trade on @UniswapExchange

Less than two weeks later, he gets liquidated and loses 100% of his collateral pic.twitter.com/V5Fn9IonJA

— Cooper Turley (@Cooopahtroopa) March 13, 2020

What’s more is that while Maker is working on fixing the bad debt expense, the ongoing amount of silence regarding if the victims can expect any support is a bit unsettling. This Reddit thread vocalizes this sentiment pretty well. Similarly, community members have expressed some of the areas where the Maker system could improve.

Regardless, it’s clear that this story is far from over. As we continue to watch it unfold in the coming weeks, we’ll be keeping up on it right here at DeFi Rate!

Stay safe!

Cooper is focused on building compelling blockchain products. He currently works as the managing director at Fitzner Blockchain Consulting and is a contributor to DAOs like MetaCartel and Moloch. He is an active member of the Ethereum community and has a strong interest in for-profit businesses such as The Block Crypto and Messari.

Leave a Reply