Bitcoin

Some maker loans never get paid back, resulting in a debt auction review

The maker community is looking for solutions An analysis by B.Protocol found that the resolution system could be used to create undersecured debt.

The researchers created small vaults for $ 128 just above Maker’s “dust” parameter, which defines the minimum size for new vaults. When Maker’s oracles were updated to reflect new prices entitling those vaults to liquidation, B.Protocol found that the debt had been unclaimed for several hours.

While investigators later closed the bad loans themselves, the mechanism could be abused to create a position in Dai that would never be liquidated.. Breaking a $ 1 million loan into small tranches of just over $ 100 would cost about $ 5,000 worth of gas. That’s a small price to pay for the ability to avoid liquidation entirely, analysts say.

Some maker loans never get paid back, resulting in a debt auction review
Some maker loans never get paid back, resulting in a debt auction review

The reason these vaults are not being liquidated is likely related to gas prices. Each billing process costs roughly 500,000 gas, roughly ten times the cost of opening any vault or filing a token transaction. Since liquidation auctions are often extremely heated and rely on owners beating each other with very high gas rates, it is unlikely that small vaults would be worth liquidating.

Yaron Velner, the founder of B.Protocol, told Cointelegraph that this was likely due to liquidation bots being instructed to ignore safes below a certain threshold “based on some guesswork.”

In response to the results, The maker community began looking for ways to limit the potential vector of attack. If exploited on a large scale, it could have consequences similar to the Black Thursday incident. Defective safes could ultimately fall significantly below the 100% guarantee threshold, which means that they would leave the system with Dai even in the event of liquidation without security. Alternatively, high gas costs could mean that the largest profitable offer won’t bring back enough Dai to pay off the debt.

The maker community is exploring a quick fix to increase the minimum size of the safe, but Velner is skeptical of this solution. It’s unclear whether a higher lows would make these vaults attractive to Liquidator bots. A longer-term solution is “Settlements 2.0”, in which the protocol would pay the liquidators directly to secure the debt.

Believing this to be largely an incentive problem, Velner notes that cutthroat competition between liquidators creates uncertainties in expected profits that cannot be analytically estimated.. B.Protocol aims to reduce the level of competition between liquidators and to limit it to regular auctions where they apply for the right to undisturbed settlement. B.Protocol was also responsible for uncovering Maker’s critical weakness with regards to Flash Loans.

Other protocols based on liquidation auctions could also be prone to this problem, Velner said.

Alex Melikhov, CEO of Equilibrium, a MakerDAO-like inter-chain credit protocol, argued in a conversation with Cointelegraph that Maker’s complex auction mechanism has resulted in “a poor track record of maintaining normal operations in times of market pressure”. “.

The solution Equilibrium adopted is based on “bailmen” that continually compromise liquidity, which is then automatically extracted from the log to repair bad debts.. According to Melikhov, the system “does not suffer from any of the drawbacks we experience with MakerDAO’s auction mechanics”.

The victims of the Black Thursday crash were ultimately not reimbursed by the maker community, partly due to an assumption that it was a market failure rather than a problem with the system. However, Given the current efforts to reform debt auctions, the Community seems to recognize its limitations.

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