The Rise of the Maker Liquidation Issue
The Maker community is currently facing a conundrum. A recent analysis by B.Protocol has unveiled a potential exploit within the liquidation system that could lead to under-collateralized debt. Researchers have found a way to create minuscule vaults—just above the minimum threshold, or “dust” parameter—formed by tiny loans of $128. As oracles update prices and these vaults become ripe for liquidation, it appears that the bad debt hangs around for several hours, unclaimed and essentially free to thieve!
Small Vaults, Huge Consequences
When B.Protocol researchers conducted their experiment, they discovered that these small vaults could be leveraged to avoid liquidation. Imagine splitting a $1 million loan into little $100 chunks, racking up about $5,000 in gas fees in the process—all while sidestepping the dreaded liquidation fate. It’s like finding a secret tunnel in the back of a haunted house; the gas costs are high, but the freedom from liquidation is just glorious!
The Gas Price Dilemma
It turns out gas prices are playing a pivotal role in this drama. Liquidation processes can chew through approximately 500,000 gas—ten times higher than opening a vault or sending a token transaction. This exorbitantly high cost means that liquidating these tiny vaults is largely unappealing, akin to going out of your way just to dodge a swarm of angry bees. And as bystander Yaron Velner, the founder of B.Protocol notes, liquidation bots might simply ignore these small vaults based on some instinctual “gut feeling” rather than cold, hard logic.
The Maker Community Strikes Back
As news spread about these findings, the Maker community began scrambling to limit the potential threat of exploitation. The specter of a large-scale attack looms, reminiscent of the infamous Black Thursday incident. Potential outcomes could include uncollateralized Dai flooding the market or even having large gas costs leaving liquidators chasing after losses. One quick fix in the air is raising the vault size minimum. However, Velner is skeptical this will suffice—will a higher threshold suddenly attract liquidator bots like moths to a flame? We can only hope they don’t end up as lunch.
A Shift Towards Liquidations 2.0
Long-term solutions are being explored, including what is being termed “Liquidations 2.0.” This revamped protocol aims to directly pay liquidators, making the job a bit more enticing—like offering a treat to a reluctant kid doing chores. Velner rightly highlights the importance of incentives in this life-or-death game of financial survival, particularly because competitive bidding can make profitable outcome estimations as slippery as a wet banana peel. Alongside these considerations, B.Protocol is also on the front lines addressing Maker’s vulnerabilities pertaining to flash loans, bringing attention to the big picture problem. And, it’s not just Maker at risk; others operating on similar principles could also find themselves in hot water.
What’s Next for MakerDAO?
As experts chime in, Alex Melikhov, CEO of Equilibrium—a cross-chain lending protocol—adds his two cents. He argues that Maker’s auction-based system is already showing cracks, especially during market turmoil. In contrast, his platform relies on “bailsmen” who constantly plug liquidity holes, thus dodging many of Maker’s more egregious pitfalls. It’s a battle of systems, folks! The victims of the Black Thursday crash sadly saw no refunds due to the prevailing belief that it was merely a market failure—not a system issue. However, the current discussions point towards a healthy recognition within the community of the serious need for reforms in their auction mechanics.
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