MakerDAO considering emergency shutdown post ETH price drop

Following a significant drop in prices of Ether, MakerDAO, the biggest player in decentralized finance (DeFi) on the Ethereum network, is considering an emergency shutdown. If the shutdown were to take place, the crypto market will be flooded with around 2.4 million ETH, which can cause the price to go down even more.

A MakerDAO spokesperson said:

The MakerDAO community and the Maker Foundation have been working hand in hand to monitor, assess and resolve the current situation.

MakerDAO lends DAI for collateral in the form of Ether. As the market for ETH drops, MakerDAO’s protocol automatically sells. The recent market witnessed losses that were too dramatic for the protocol’s auctions to keep up with. Currently, the stakeholders are hoping to avoid the disabling of the protocol. Ethereum developer Ryan Berckmans wrote:

An emergency shutdown (not happening now) would cause DAI holders to take a haircut, whereas the social contract of MakerDAO is that MKR tokens take a haircut in the event of system failure. Therefore we should try and ensure that MKR holders take a hair cut by avoiding emergency shutdown if possible. I heard that emergency shutdown is not being considered as an immediate option.

Developer LongForWisdom noted that the shutdown is a remote prospect but might be implemented if ETH falls to $80 or so: “If Ether price drops another 30, 40%, then we might be looking at that.”

In case of an emergency shutdown, new CDPs (Collateralized Debt Positions) are frozen, auctions finalize and remaining DAI can be redeemed for ETH at a fixed price set at the time of the shutdown. Robert Leshner, the founder of DeFi protocol Compound Finance, chimed in saying:

If MakerDAO experiences an emergency shutdown, DAI becomes redeemable for the ether backing all of the DAI outstanding. It stops behaving like a stablecoin and begins behaving like ether, price-wise. This will have unintended consequences for the entire ecosystem, some of which have planned for the possibility of this event, and others that have not.