Maker MCD Ethereum System Liquidation report and Black Thursday Compensation Analysis

It seems like this is the crux of it. We’re going to need at least two roles, a developer to create a website and smart contracts, and a coordinator / project manager type. Given that we’re talking about transferring more than 100k DAI in value, we can probably budget on the order of 10k DAI for paid staff to see that it gets done well and promptly. Is there a MIP to help make that happen?

Yeah, that’s the conclusion I came to when I put together the draft poll. I’m not sure if we need that poll anymore. Is there consensus that compensation can be in DAI? Bear in mind that the amount of compensation is an orthogonal question to the token used to compensate. As LFW said, we could use today’s ETH price to determine the amount of DAI compensation which is practically the same as compensation in ETH.


The symmetry is broken in this picture. When talking about downside the question is who stood to gain on the upside of a growing network?. Vault holders - correctly as quoted - will eat their piece of the downside, but if the UI’s and Ethereum Network weren’t the direct beneficiaries of upside of users opening Vaults (like, for example MKR Token Holders) then pinning downside to them is plain scapegoating. The user you’re aiming at (“mass adoption” remember) interacts with Maker. Even the distinction between the foundation and the token holders is like the CEO saying he’s not responsible for wrong billing because the finance department didn’t do their job. The brand happy to present one face when selling a product & claiming benefits should be the same brand the user interacts with when things don’t go according to plan.


Second this. This issue won’t be resolved in a community / pitch in where you can fashion.

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I’d say that the split is between ~24.67% (what vault owners expected) and 10-12% (what should be expected).

Your interpretation of symmetry is fairly sketchy, in my view, for several reasons:

  1. MKR Token Holders already suffered the downside from this in the form of FLOP auctions. Recapitalising the system is the only thing MKR Token Holders are obligated to pay for (by design).
  2. It’s also worth mentioning that UI’s in some cases do sell services that benefit from network growth (increased customer base.) I believe DeFi Saver charges for one or more of their services, though I forget which.
  3. You could also argue that the Ethereum network benefits from the DeFi projects built on top of it.

It may be beneficial for MKR Token Holders to pay some amount of compensation for Vault Holders in this situation, but they certainly aren’t obligated to do so.

I appreciate you are all frustrated, but I’m doing as much as possible to approach this from a position of objectivity and trying to figure out how much compensation MKR Token Holders are actually responsible for rather than giving a knee-jerk response.

Why? Are MKR Token Holders responsible for the expectations of Vault Holders? 24.67% is the theoretical maximum in a system that relies on auctions, it’s not a reasonable assumption to receive that much back. A reasonable assumption is based on historical return in the case of liquidations (17.7%), a reasonable assumption given what was possibly a once or twice in a lifetime event is 11%. Splitting the difference between the reasonable assumption given the situation and what was actually received seems like the fairest outcome to me given that the unprecedented market situation was made worse by insufficiently defensive auction parameters (the thing that MKR Token Holders are actually responsible for).

Like if anyone can provide a solid argument as to why MKR Token Holders are responsible for compensating the full amount given their role in Black Thursday, please share it. Note that I’m talking about responsibility, not what may or may not make sense given PR issues.

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Just putting the numbers on what you said and offering some thoughts. For reference that would be:

(Max) 24.67 / 2 = (Mid) 12.33500

(Max) 24.67+ (Mid) 12.335 = MaxMidAvg(37.005/2)

MaxMidAvg = 18.5025% (0.8% above the 17.7% average remaining vault collateral pre BT)

Note: The Avg between these two would be (18.5025+17.7/2) ~18.10125%

I don’t get why there isnt a poll for compensation in DAI or ETH/BAT personally.

Please don’t get me wrong as any compensation is better than no compensation - It just seems a little bit off as the compensation is regarding how much % of ETH and BAT should have been remaining in users Vaults effected by the 0 bid auctions taking place.

To my understanding:

A vote will take place with options to what extent of compensation should be made in terms of the remaining % of collateral Vaults should have been left with.

MakerMan’s comprehensive report shows us the average was 17.7% before the 0 bid auction exploit became known.

Once this is decided each Vault effected by the 0 bid auctions will be remunerated with that % of collateral - be it ETH or BAT so that everyone is equally made up the exact same % of remaining collateral.

Perhaps just outlining how being paid in DAI wouldn’t be a disadvantage would help.

The way I see it - it would be a disadvantage if compensation were made in DAI when the point here is to restore Vault collateral balances to an equal threshold of remaining underlying overcollateralized collateral.

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This is another thing that needs to be figured out. My assumption was that we’d just send DAI directly to the controlling address for each Vault, rather than trying to top up the Vaults directly. Maybe that would be a better way to do it though, not sure.

My assumption was that we’d just send DAI directly to the controlling address for each Vault,

If it were paid in DAI it would be good to know how that would work. Example:

A vault is owed 100 ETH in collateral compensation (at the time of compensation 100 ETH is $20,000)

Would they get 20,000 DAI?

Ethereum network benefits are incidental. An example from the physical world would be that New York wil benefit if Amazon builds a DC there (taxes, gdp etc), but that doesn’t mean they’re responsible for the product.
The same for on-sellers like the UI’s. If you’re a product manufacturer and the retail store made a mistake in the promotional display their liability is limited. If, as in this case, your product is sold by a limited number of UI’s and you don’t care enough to check the way they’re selling it then, well, that’s what you offer I suppose.

The arguments I’m making are on the assumption that Maker wants to compete in this space with a good brand and a competitive product. I may be wrong about that if the corporate response will be limited to what we’re “responsible for” in the fine print.

Maybe the excellence thing isn’t reachable for a DAO setup? Maybe it goes into the “tragedy of the commons” / communism phenomenon?
I don’t know really, but I’d be concerned if I were a heavy Maker Token holder.


It’s not that we don’t care enough, it’s that the protocol is completely open for use (that’s kind of the point, right?) We could make changes so only approved UI’s could access the Protocol. It doesn’t feel like that is a win though.

This whole process is taking way too long, if i am not happy with the terms of compensation i will be joining the class action, simple.


Part of this might be that we’re seeing the Maker Protocol differently. Like, MKR Token Holders aren’t a corporation, they are another set of ecosystem users who manage and grow the protocol in exchange for fees. You’re basically asking one set of users to be entirely financially responsible (outside the financial responsibility already built into the protocol) for a second set of users, this doesn’t seem reasonable to me.

Like if that is consistently the case, then no one will want to hold MKR, and the system will be managed by whichever centralized entity decides it’s worth it, and we lose the whole aspect of decentralisation that the Protocol is aiming for.

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One idea is to require vault holders to withdraw the DAI from a compensation contract. As part of the process, they would agree to indemnify the protocol against legal action. This isn’t an airtight legal gesture, but it seems like better than nothing to me. I wouldn’t want vault holders to receive compensation and then join as a plaintiff in a class action suit against some facet of Maker.

This would require a bit more software development and testing than the most expedient approach though.


@Joshua_Pritikin With the right compensation being made available I’d support this fully, as someone effected greatly too.

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Do you think that the class action suit will be resolved more quickly than this process (genuine question)?

Yeah, maybe. That gets way complicated in terms of work to be done to make this actually happen.

Like my imagining of this process was always:

  1. Get list of affected Vaults
  2. Decide percentage amount to compensate
  3. Decide DAI value of ETH to compensate at.
  4. Send the difference between amount to compensate, and amount received to the owners of each Vault in DAI using an executive spell.
  5. FLOP auctions cover the bad debt caused by generating unbacked DAI.

This is the quickest way I can see this working.


MKR Holders aren’t responsible. The compensation is a way to achieve some goal, not an obligation.
I specified those numbers to point to what I feel is fair from a vault owner’s viewpoint. My reasoning is:
a) vault owners was misinformed about risks (that’s why ~24.67%)
b) the worst scenario in a properly(?) working system (as per the report) is 10-12%

PS: There are no objective numbers exist. We can only bet on what numbers can do most to achieve the goal.


Can someone clarify the following?

The amount by which the system became undercollateralized (and the subsequent flop auctions rectified) is also exactly the amount by which vault owners should be compensated, assuming 100% compensation. Given that the price of ETH is going up every day, doesn’t it make sense to repeat the flop auctions, hold the ETH designated for compensation in the system surplus and then figuring out how to compensate the vault owners? If too much ETH is bought in this process (i.e. if vault holders are only partially compensated), the extra ETH can be converted back to MKR and then burned.

This avoids needless loss due to the increase in the value of ETH during this decision making period.

I don’t think this is correct.

The system surplus only holds DAI, not ETH.

We could buy ETH now and stash it somewhere though, I suppose. I believe we would need new smart contracts, so I don’t believe it would be a quick fix.

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I see. Could you explain why this isn’t the case? In general, what we need is an upper bound on the maximum possible compensation amount in terms of ETH.

I understand and it is an interesting question about how to execute this. However, it seems in everybody’s interest to figure out how to achieve this ETH stash now (maybe it could even be held by a centralized entity like the Foundation) then sort out the details of compensation later.

I don’t have the answer to how but perhaps someone has an idea to secure and hold that stash.

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