The dark Thursday crypto market crisis has caused MakerDAO (MKR) to lose $ 4 million and the project is currently looking to fill the void. This is a big blow to decentralized financial projects (DeFi), some are wondering whether the ecosystem can protect itself in the “black swan” fluctuations.
Defi is on the edge of a cliff and will collapse if the ETH price continues to plunge again.
Millions of traders were attacked
The price collapse caused by the Corona virus and the oil price crisis is an effective stress test for Ethereum. The network became congested as users rushed to sell off, incredible volatility is devastating on some systems.
Alex Melikhov, CEO of EOSDT – a MakerDAO version, running on EOS – explained what happened to Cointelegraph. Melikhov argues that this problem is because MakerDAO, which is used for price feed, fails when prices fall like falls.
Therefore, the price on the chain in the system is still outdated during a period of significant price fluctuations – $ 166 / ETH on the chain instead of $ 133 / ETH in the market.
Melikhov said that this caused a perfect storm, in which MakerDAO holders were not willing to buy Ether at 20% higher prices in the market than the usual 3% discount. This natural lack of buyers seems to have paved the way for trouble. Melikhov explained:
MakerDAO allows zero bids at auctions, so some market agents have liquidated ETH for free.
As a result, the manufacturer has accumulated up to $ 4 million in unsecured debt. After considering an emergency shutdown, the Maker Foundation decided not to take action. Melikhov said that this led to the widening of the collateral loophole, currently at $ 5.5 million on March 13.
The loss was less than a month after two sophisticated attacks took away 3,000 ETH in collateral from the DeFi bZx platform.
Chaos at DeFi
Melikhov emphasized that recent issues of MakerDAO are technical, not economic:
These situations indicate a shortage in the MakerDAO system and weaknesses in the Ethereum network capacity.
The DeFi community may be particularly sensitive to vulnerabilities in the MakerDAO system, as it currently holds more than 55% of all Ether locked in DeFi projects, according to Defipulse. The company that holds stabelcoin Dai is also the most traded asset in decentralized exchange platforms like Uniswap and Kyber.
The entire DeFi ecosystem can change dramatically if MakerDAO fails, Melikhov said.
Synthetix CEO and co-founder Kain Warwick has taken a more positive tone about recent events, emphasizing that the discount has nothing to do with the fundamentals of Ethereum. However, Warwick acknowledges that the price cut has revealed several holes in DeFi:
The recent decline is a macro trend due to uncertainty, so this short-term price action on ETH is not a reflection of the network's long-term viability. We have certainly seen some issues springing up in the past 24 hours as the protocols have experienced shock due to price action.
Michael Anderson, co-founder of DeFi investment fund, Framework Ventures, asserted that price attacks are exogenous factors, however, leading to the exploitation of their system design. He added:
These problems still exist because we now have a true amount of value in the DeFi ecosystem, and thus encourage finding weaknesses.
Fire proves gold, arduous challenge
The MakerDAO community has started emergency measures to stabilize the network. In its whitepaper, a provision for lower collateral was included, including creating a new MKR and auctioning it until the borrower paid the debt in full. That auction is expected to take place in the next few days.
Communities are also developing measures to prevent similar problems in the future.
bZx has also revealed its plan to restart operations, seeking to learn from past mistakes. User losses will be paid by the group's stakeholders and bZx, while security is set to be strengthened through more rewards and audits.
Kain Warwick argues that price action and subsequent gaps act as an important lesson for the ecosystem.
The good news is that these tests are a clear demonstration of Ethereum's anti-freeze capabilities – becoming stronger in unpredictable volatility.
Sowmay Jain, co-founder and CEO of DeFi InstaDApp support wallet, is similarly optimistic about the future prospects of decentralized finance.
This painful time reminds us that it is still very early in this young space, and there is still a lot of room for improvement. However, I very much hope this will ensure that the DeFi ecosystem returns to an even stronger economy.
Melov summarizes lessons learned from this chaotic period. He also expressed hope that DeFi will see more active development on other blockchain platforms:
In general, hopefully it will lead to a more accurate financial model and maintain more technical contingency for this area. We at Equilibrium strongly believe that the inter-chain approach will greatly improve the ecosystem's risk profile.
Michael Anderson believes that there is no single solution that can prevent further attacks:
We will play whack-a-mole, for a while, but every time we find something the industry thrives for it.
This was to be expected
Messari co-founder Ryan Selkis expressed his skepticism about DeFi security, in January, prior to any hacking. Extremely optimistic to say that there won't be a fluttering error before DeFi gets bigger, he concludes.
Anderson, whose fund is heavily dependent on DeFi investments like Chainlink and Synthetix, also predicts fire testing. I said:
In the past, Serge (Nazarov) from Chainlink has said this and we agree that the DeFi ecosystem will need to overcome the luxuriant grove of progress. Discover these issues right now, while the stakes are relatively low, will put DeFi in a much better position to get more value and develop better products.
Notable cryptocurrency evangelist Andreas Antonopolous also apparently called this discount a few months before it happened. Speaking in the January 3 episode of the podcast, Antonopolous said the reason it would collapse was because of a lot of venture capital, corporate investment and private investment from individuals based on cheap money and income. Use from excess cash in the portfolio, etc. , like in any other part of the economy, will run out.
If the decentralized financial sector can successfully navigate this storm, user confidence will surely return.
However, it is still unknown how long the storm will last. And everything also depends greatly on the growth of the world economy.
According to Cointelegraph
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