Signal Thread: Do we compensate vault holders that were completely liquidated?

[Joshua_Pritikin]

There is currently toxic uncertainly about whether Maker will compensate vault holders that were completely liquidated. This uncertainty is likely creating friction among current and potential vault holders; They are wondering whether to increase their leverage (and create DAI) or not. It’s hard to known for certain what people are thinking, but the peg is above 1.0, the DSR set to zero, and the stability fee at 0.5% … for days! I believe there is substantial fear, uncertainty, and doubt infecting current and prospective vault users.

This poll does not try to determine the exact compensation formula. Correct me if I am wrong, but I’ve read that about $8 million was lost. About 2/3 of the auction failure was absorbed by the Maker protocol and, as I write, is being recapitalized. I expect the defensible loss to vault holders was in the range of $1-3 million. If this poll passes then we’ll figure out how much to repay, raise the funds by minting and selling MKR, and airdrop DAI into the respective accounts. This does not have to happen immediately, but could take place over 1-3 months (TBD).

• No compensation
• Low compensation
• Medium compensation
• High compensation
• I disagree with the options in this poll (details below)

If the poll finds general support for compensation, it will be important to conduct an on-chain poll so that MKR holders (whose investment will be diluted) have a chance to weight in.

[Mitote]

Does high mean basically full compensation? Just making sure it dosen’t mean overcompensation

[Joshua_Pritikin]

Hm, I should have been more specific. High compensation is the estimated refund (in DAI) if auctions had performed optimally. Medium compensation is 75% of High compensation. Low compensation is 25% of High compensation.

Normally auctions refund remaining ETH, but I don’t think Maker should commit to refunding in ETH units. Maybe that should have been a poll option?

[LongForWisdom]

You need to maybe clarify this more carefully. When you say optimally, do you mean optimally against the oracle price? Against the market price? Bear in mind that the oracle stalled for a couple of hours due to gas prices.

[Joshua_Pritikin]

Okay, I guess optimally means how the auctions would have performed if the oracle price was updating correctly and the rest of the auction proceeded according to optimistic theory.

[monet-supply]

I think we need to be careful not to overcompensate, as normal price fluctuations could easily wipe out vaults even when auctions and oracles are operating effectively.

Thinking this through out loud, vaults go up for liquidation when OSM price is 150% of debt, and then adding the 13% penalty vault holders are left at 150/113. So the ratio of collateral at OSM price to debt is ≈ 133%. However, the OSM has a one hour delay, so if the market price drops ~25% in one hour the vault would be undercollatetalized and vault holder would receive 0 collateral. I think the idea that vault holders are guaranteed to receive some portion of their collateral is mistaken.

[Joshua_Pritikin]

@monet-supply

I think the idea that vault holders are guaranteed to receive some portion of their collateral is mistaken.

I don’t think anybody is operating under that mistaken assumption.

@monet-supply

Thinking this through out loud, vaults go up for liquidation when OSM price is 150% of debt, and then adding the 13% penalty vault holders are left at 150/113. So the ratio of collateral at OSM price to debt is ≈ 133%. However, the OSM has a one hour delay, so if the market price drops ~25% in one hour the vault would be undercollatetalized and vault holder would receive 0 collateral.

Alright, but is that what happened to every vault? Presumably, some of the vaults would have received some collateral back after a successful auction.

If we agree to compensate vault holders then we’ll need to figure out the maximum amount of collateral (converted to DAI) that they could have hoped to get. That’s the high compensation amount.

[monet-supply]

I completely agree with your second point, we would need to determine a theoretical max recovery for each vault based on the time of liquidation and comparing the OSM vs the market price (and maybe discount it a bit to account for market impact/slippage).

However, I have seen many posts from affected vault owners which seem to suggest that receiving 0 recovery from a liquidation should be impossible, which is not true. So I think we need to communicate that clearly to vault owners so they can understand the logic behind any potential compensation scheme.

[bit]

Is a compensation from the Maker Foundation’s assets also open for discussion?

[LongForWisdom]

We can discuss it, but ultimately the community and MKR Holders is not in control of those assets, meaning we can’t credibly vote to use them to compensate people.

[bit]

OK, I’m glad that I won’t be censored here for bringing that up. Let’s leave that aside for the moment.

How about doing a fundraiser for people who lost more ETH than they should have (considering that most collateral could’ve been sold at DEX-es if that option existed)? Also, if the auction system was written with additional checks and perhaps delays - they wouldn’t lose so much.

[hocr22]

Hey @bit could you explain in a little more detail what you mean when you say “for people who lost more eth than they should have”
Do you mean (1) people who had to spend money to protect themselves from liquidation once the auction issue was discovered but weren’t actually themselves liquidated?
Or do you mean (2) people who were liquidated, but due to the auction issues didn’t get as much collateral back as they otherwise would, but didn’t lose absolutely everything?

[Mitote]

@Joshua_Pritikin

I don’t think anybody is operating under that mistaken assumption.

Uhh I am pretty sure most vault holders were operating that assumption. The official interface only highlights the 13% penalty… If we made it absolutely clear that vault holders could easily lose everything, then this whole debate would be completely different.

[Aaron_Bartsch]

Based on @MakerMan’s post/analysis in the other thread : Compensating vault holders that liquidated at 0 bid?! I think 21% compensation would be fair. Not sure where that lies on the voting so I voted for Low/Medium compensation.

[bit]

@hocr22

Hey @bit could you explain in a little more detail what you mean when you say “for people who lost more eth than they should have”

I mean they shouldn’t have lost more than the liquidation penalty (13%). In the worst case their ETH should’ve been valued at $90.

[chaser]

I think compensating for all involved unexpected behavior (including the lack of a functional keeper base) is the right thing.

Also, vault owners lost ETH, not Dai. It’s worth considering when thinking about refunds. It is definitely more complicated to carry out and places a heavier weight on a market, but would do great for the integrity of the community.

[Robin_masters]

I certainly hope high compensation means full(!) compensation and not like 80 % or 90 % compensation. This loss is absolutely on MKR holders (they are responsible for ensuring that the protocol works s intended) and they need to take the fall here to the full extent.

Also why should Maker not commit to compensate in ETH? that is how the protocol was supposed to work. If your collateral ratio falls below 150% some of your ETH collateral is sold to cover the borrowed amount and you receive the remaining ETH back. If people get compensated in DAI how could you possibly set a price on the ETH people lost. Everyone got liquidated at a different price level and there is high probability ETH price will go up a lot by the time we get compensated. Why would we add more to the losses of people who already lost their life savings?

[Robin_masters]

in that case you shouldnt be voting medium/low, the 21 % you mention is the maximum compensation vault owners can expect (that would be also fair compensation). If you want to receive 21 % of your collateral back, vote high compensation instead.

[Robin_masters]

we should not take into consideration how low ETH went in price. I dont care if at some point it was sold at 90 $, I got liquidated at 135 $s per ETH, I want to get my money back based on that price. This is how the vaults are supposed to work, and it was the MKR holders job to keep it working properly. They failed they need to compensate us!

[mmoossttaaffaa]

Vault owners lost less than 2 m $… yes we can compensate them but what if it was 20m?

everybody knows the risks of smart contracts

Maker was designed to be diluted to protect DAI from turning undercollatarized not to protect vault owners.