According to CoinDesk, the MakerDAO protocol that underlies automated lending on the ethereum blockchain has run out of collateral, threatening its solvency.
MakerDAO faces an emergency shutdown with $4 million of its dollar-pegged ‘dai’ stablecoin not backed by an underlying cryptoasset, according to a stakeholder call held Thursday, CoinDesk reported.
MakerDAO is an automated lending protocol that runs on the ethereum blockchain. It uses a native currency called ‘dai’, which is pegged to the dollar at a 1:1 ratio.
Under the MakerDAO protocol, every dollar of dai in circulation is supposed to be backed by at least $1.50 of ethereum, locked by means of a smart contract on the ethereum blockchain.
However, the dramatic fall in the ethereum price during the last few days has reportedly blown through this 150% collateralisation level, leaving some lending activity unbacked.
According to an account on Twitter, the problems at MakerDAO were exacerbated by a stale price feed during ethereum’s price collapse on March 12. This gave the ethereum price as $166 when the market price elsewhere was $130.
This price discrepancy then allowed users of the MakerDAO system to pledge dai tokens and obtain ethereum for free, depleting the system’s collateral backing.
At $125 per token in late New York trading on Thursday, ethereum’s price has fallen by nearly 50 percent in merely five days, amidst a dramatic sell-off in cryptocurrencies.
Dai was trading at 1.04 to the dollar, 4 percent weaker than its notional peg.
CoinDesk reports that a spokesperson for the MakerDAO Foundation had said: “The MakerDAO community and the Maker Foundation have been working hand in hand to monitor, assess and resolve the current situation.”
The episode is reminiscent of an earlier accident involving smart contracts and ethereum.
In 2016 ethereum split into two after hackers managed to exploit a loophole in an automated crowdfunding contract called DAO. One branch of ethereum unwound the affected transactions.
Earlier today Tim Swanson, head of market intelligence at Clearmatics, tweeted that the ethereum blockchain had nearly 100,000 unconfirmed transactions, showing strains on the system.
Today, ethereum transaction fees (called ‘gas’ prices) have jumped and the average time for confirmations reached 44 minutes. Blocks of new ethereum transactions are supposed to be produced every 10-20 seconds.
[Update: Late on March 12, the Maker Foundation published a blog in which it said it would hold a vote to approve the minting and sale of a native token called MKR in order to recollateralise the MakerDAO system and restore the 1:1 dai/US dollar peg.]Don’t miss any more New Money Review content: sign up here for our newsletter
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