Some loans on Maker are never liquidated, prompting debt auction overhaul

Published on by Cointele | Published on

The Maker community is looking for solutions after an analysis by B.Protocol suggested that it is possible to exploit the liquidation system to create under-collateralized debt.

The researchers created small vaults for $128, just above Maker's "Dust" parameter that defines the minimum size for new vaults.

As Maker's oracles updated to new prices that made these vaults eligible for liquidation, BProtocol found that the debt remained unclaimed for several hours.

While the researchers later closed the bad debt loans on their own, the mechanism could be abused to create a Dai position that would never be liquidated.

The reason why these vaults are not liquidated has likely to do with gas prices.

Each liquidation process costs approximately 500,000 gas, about ten times higher than the cost of opening each vault or sending a token transaction.

Bad vaults could eventually fall decisively below the 100% collateralization threshold, meaning that even if they were liquidated, they would still leave the system with unbacked DAI. Alternatively, high gas costs could mean that the largest profitable bid would not return enough DAI to cover the debt.

The Maker community is studying a quick remedy of raising the minimum vault size, but Velner was skeptical of this solution, as it is unclear if a higher minimum would suddenly make these vaults attractive to liquidator bots.

A longer-term solution is "Liquidations 2.0," where the protocol would directly pay liquidators for securing debt.

Given the current efforts to overhaul debt auctions, it appears that the community is beginning to recognize their limitations.