MakerDAO to Liquidate Overleveraged Vaults and Absorb $1.3M in Bad Debt

USDC, USDP and GUSD Vaults Affected

By: Samuel Haig Loading...

MakerDAO to Liquidate Overleveraged Vaults and Absorb $1.3M in Bad Debt

DAI degens beware.

MakerDAO, the largest DeFi protocol with $6.4B in total value locked (TVL), has said it will liquidate heavily leveraged vaults in a bid to prevent the protocol from accruing excessive bad debt.

“Due to liquidations being previously disabled on the mentioned vault types, some positions accrued interest above their collateral value, resulting in being undercollateralized,” MakerDAO tweeted.

In total, Maker has accrued $1.3M worth of bad debt, with its Twitter account describing the sum as “insignificant.” The team also predicts that the liquidation auctions will be completed at a maximum discount of 1%, estimating that the protocol will take a total hit of roughly $1.5M.

MakerDAO is an overcollateralized debt protocol. Borrowers can mint its DAI stablecoin by depositing collateral assets in its smart contracts. DAI is the fourth-largest stablecoin with a $5.3B market cap, according to CoinGecko.

Earlier this month, holders of Maker’s governance token, MKR, voted to implement parameter changes that will trigger liquidations for all USDC, USDP, and GUSD vaults that exhibit a collateralization ratio of less than 101%. MKR is down nearly 30% in the past month.


Bad Debt

“The expected 1.5M DAI loss from this liquidation event only represents ~2% of the current positive System Surplus, which stands at 74.2M DAI,” MakerDAO tweeted.

Falsely accrued interest will also be cleared from the protocol alongside the liquidations. The liquidations are expected to be initiated following Maker’s next executive vote on Nov. 30.

Maker also stressed that USDC, USDP, and GUSD are the only assets that MakerDAO users can leverage to a 101% collateral ratio.

“All other vaults…are safe and properly overcollateralized,” Maker said, adding that the bad debt does not represent a threat to the protocol’s financial health or solvency.

The move comes after Aave, the leading DeFi money market protocol holding $3.8B of digital assets, absorbed $1.6M worth of bad debt after an opportunistic trader attacked its illiquid CRV pool.

Major CRV Trade on Aave Leaves Money Market With $1.6M in Bad Debt

Major CRV Trade on Aave Leaves Money Market With $1.6M in Bad Debt

Trader Had Warned Aave of 'Trading Strategy' Last Month

The Defiant The Defiant

The trader had earlier ransacked Mango Markets for $116M in October, warning that a similar “profitable trading strategy” could be used to exploit Aave.