Today we saw a Makerdao liquidation auction gone bad, is it any surprise? Their naive liquidation model is to auction bad debt into distressed markets. A dangerous proposition.
Today Makerdao lost $4M worth of user collateral in what is a big fail of its debt liquidation auction. There was a rapid devaluation of ETH price causing ethereum backed DAI loans to fall into liquidation which were then sent to auction. We at VIGOR protocol have been saying for a long time that auctioning tokens into distressed crypto markets is a terrible idea. Precisely what we have been saying has happened. Market stress events are exactly a time when all hell breaks loose. Today during the chaos liquidity dried up, their oracle feed became stale at an incorrect high price and the ethereum block chain itself became virtually unusable due to gas price spikes (mempool flooded). This created a liquidity vacuum in which a lone bidder was able push through a last second transaction by paying a high gas fee to win $4M worth of collateral with a bid of $0, a loss to the user and ultimately a loss to the balance sheet and reputation of the Makerdao protocol itself.
This tragic event is no surprise. Makerdao is not the future of finance. It is a good simplistic first attempt at a live crypto backed stablecoin. But it should be applauded for that and no more.
Makerdao will survive today’s challenge for sure, but it’s viability in the long run is questionable at best. Finance has always been a race to innovate and is a race to the bottom with fees; Makerdao (and clones) cannot last long in the face of innovative competitors like VIGOR stablecoin built on EOS. VIGOR is the only crypto backed stablecoin founded on financial engineering principles to deal properly with jump risk and volatility risk embedded in token prices and has frictionless bailouts to boot. VIGOR will soon deploy on the EOS chain (rather than ethereum) where it’s smart contracts are written in C++ (fast and efficient) and it is run as a DAC using EOS native automated multisig permissioning (based on eosDAC), and of course no gas prices.
It is our core philosophy that a stablecoin platform should enable pricing of those risks and enable users to separate and trade them. VIGOR protocol implements a pricing framework based on equity default swaps, a risk framework based on standard risk-based-capital methods used by insurance regulators, and a structured product like an index CDO. With VIGOR stablecoin you can say goodbye to artificially high borrow rates chosen at random, be free from arbitrarily high liquidation limits, and eliminate the practice of auctioning tokens into distressed markets. With VIGOR the bailout process is frictionless, the bad debt is recapitalized by insuring the collateral ahead of time. An insurance pool stands ready to absorb and recap the bad debt at a moments notice. Insurers stake into the pool and earn the premium (paid in VIG tokens) which adjusts to attract more insurance capital if solvency drops below target, providing confidence that each VIGOR stablecoin would always be backed by at least $1.
Stablecoin protocols need to be kings and queens of stability. They need to own the topic of stress testing, price jump risk, credit risk, and liquidity risk. A stablecoin borrow rate needs to represent compensation to bear those risks, a set of risk premia. (note, alternatives to makerdao like bancor or other automated market making protocols beware also, they are defining the borrow rate in terms of trading fees based on market microstructure; this is inappropriate compensation for default risk.) VIGOR stablecoin has it figured out. Accept VIGOR and none other.
Read the VIGOR whitepaper and try our testnet dapp