Introduction
MakerDAO's Liquidation 2.0 system upgrade replaces English auctions with Dutch auctions and integrates flash loans to reduce barriers for liquidators and liquidity costs. This article explores the key components of MakerDAO's liquidation system, factors affecting its efficiency, and the upcoming changes.
Liquidation 1.0 System Design
Core Functions
- Monitor collateral prices and liquidate positions when thresholds are breached to prevent bad debt.
- Stabilize DAI's peg by managing its supply dynamics.
Price Stability Mechanisms
- Stability Fee: Adjusts borrowing costs to influence DAI supply.
- DSR (Dai Savings Rate): Encourages DAI holders to lock funds (currently 0.01%).
- PSM (Peg Stability Module): Allows 1:1 swaps between DAI and USDC, leveraging Coinbase arbitrage.
Auction Types
- Surplus Auction: Burns MKR to reduce supply when system surplus exceeds thresholds.
- Collateral Auction: Sells undercollateralized assets in batches via English auctions.
- Debt Auction: Mints new MKR to cover system deficits during crises.
312 Event Analysis
- Bottlenecks: Ethereum congestion slowed multi-round auctions.
- DAI Shortage: High premiums reduced Keeper participation.
- Solutions: Lowered DAI rates, added USDC collateral, and initiated debt auctions.
Liquidation 2.0 Upgrade Plan
Key Improvements
- Dutch Auctions: Faster price discovery with time-decaying bids.
- No Keeper Barriers: Partial collateral purchases allowed.
- Flash Loan Support: Enables DAI borrowing within a single transaction.
- Dynamic Incentives: Rewards prioritized for high-risk collateral liquidations.
Benefits
- Efficiency: Streamlined auctions reduce gas costs.
- Liquidity: Flash loans tap into DeFi-wide DAI pools.
- Resilience: Targeted incentives improve crisis response.
FAQs
Why switch to Dutch auctions?
Dutch auctions simplify bidding and lower Keeper costs by eliminating multi-round overhead.
👉 Explore DeFi liquidation strategies
How does PSM stabilize DAI?
PSM’s USDC/DAI arbitrage loop leverages Coinbase’s 1:1 redemption to maintain the peg.
What’s next for MakerDAO?
Integration with DEXs and lending protocols may further enhance liquidity access.
Conclusion
MakerDAO’s 2.0 upgrade addresses 1.0’s inefficiencies with Dutch auctions, flash loans, and smarter incentives. The system now better withstands volatility, as seen in the 519 market dip compared to 312.