Nothing has to be auctioned - if the compensation is paid in MKR.
Only more MKR need to be minted.
If the compensation is paid with DAI, then an auction might be needed. That would tank the MKR price. The auction is made in large lots of 50`000 DAI, so only whales would get the benefit of the lower price. That centralizes the protocol even further and leaves a bad aftertaste.
Read up about one auction example:
As I understand, the MakerDAO system has surplus DAI because of this auction.
However lost gains need to be calculated.
If the liquidation system works efficiently, than the vaults get up to 24.67% of the collateral in ETH, BAT back. Calculated in ETH terms this is a 4x in DAI value since 12.03.2020. It will be more, much more later in the bull run.
Timely compensation matters. If the compensation is delivered in 10 Years, then the DAI value will be 100 to 1000x.
MakerDAO is responsible for the technical risks of the protocol.
The vault users are responsible for the market risks.
The accountability should be at the least
0-bid loses are clearly technical.
The market was also in a big dip.
Are you a whale? Distributing some surplus peanuts?