Today, MIP45, the proposal to upgrade the Maker Protocol’s Liquidations system, which should help safeguard Dai’s stability, was placed into the Maker Governance portal as an Executive Proposal. MKR holders can now vote on the activation of Liquidations 2.0, which, if ratified, should improve system efficiency and create more opportunities for community members to participate in collateral auctions via Auction Keeper software and more conventional interfaces.
The upgrade represents a year’s worth of work, combined with a great deal of community feedback and support. Importantly, it also marks the last major technical and functional contribution that any Foundation team will provide the DAO as it moves toward complete decentralization.
Below, we summarize the importance and benefits of the new Liquidations system and share how the community can prepare for its formal launch. If the vote is ratified, and Liquidations 2.0 released, a high-level overview of the system will be published here in this blog.
The New Liquidations 2.0—Simple, Efficient, and Robust
The Liquidations system of the Maker Protocol helps Dai maintain its soft peg to the US Dollar by ensuring that all Dai generated through Maker Vaults is sufficiently backed by collateral. When the value of a collateral asset in a Vault falls below the minimum required Liquidation Ratio for that asset type, the Vault is liquidated and the collateral is auctioned to cover both the debt and the Liquidation Penalty.
While the current Liquidations system has served the Protocol since the launch of Multi-Collateral Dai, much has changed in the interim, necessitating enhancements to allow Maker’s auction system to scale with Dai generation. For example, numerous collateral assets have been added to the Protocol, and the amount of Dai in existence has increased over twenty-fold in the last year. Past upgrades (Liquidations 1.1 and 1.2) offered several improvements, but Liquidations 2.0 will remove limitations and offer qualitative advancements. Additionally, and perhaps most importantly, the system upgrade reflects new needs and interests of the MakerDAO community and the larger DeFi ecosystem.
Functionally, the new Liquidations system will provide greater security, predictability, and decentralization, facilitating wider participation by the Maker community and DeFi sector as a whole.
Overall, Liquidations 2.0 will:
- Be more predictable and secure. The redesigned system has been audited by several well-respected organizations,
- Enable an environment that will enrich the DeFi ecosystem.
- Provide easier, less expensive, and more flexible participation.
On a technical level, the system upgrade will efficiently handle liquidations at the scale the Protocol and Dai adoption levels now require. Key changes include:
- A new auction model. The English auction model will be replaced with a Dutch model, in which the initial asking price is high, and then decreases deterministically over time.
- Acceptance of partial bids. Vault collateral will no longer need to be bought in lots of 50,000 Dai (or all at once for smaller Vaults). In the new system, one or any number of bidders could purchase collateral at the asking price.
- Support for flash loans, enabling more open and capital-efficient participation.
- Potential DEX and aggregator integration, allowing greater competition between bidders and access to more of the market’s liquidity.
For a complete overview of the system, read the Liquidations 2.0 Module documentation.
Prepare for the Upgrade
If you run a Keeper, are a developer or engineer behind a DeFi platform or DEX, or are a Dai holder who wants to participate in auctions, here is what you need to know should the community ratify the Liquidations 2.0 release.
Information for Keepers
Because Liquidations 2.0 is a complete overhaul of the current system, anyone who runs a Keeper will need to update their software to continue participating in collateral auctions. The following links will help prepare for the upgrade:
- Liquidations 2.0 documentation.
- The Liquidations 2.0 Collateral Auction Integration Guide, a valuable resource to help integrators transition from Liquidations 1.2 to 2.0, and streamline the integration experience for all partners.
- Auction-Demo-Keeper documentation offers Keeper operators assistance in transitioning their systems to Liquidations 2.0.
Liquidations 2.0 also reduces the amount of funds Keepers need to hold in their wallets, as Dai and collateral are no longer needed; all that’s required is enough ETH to execute transactions.
Implications for MetaMask Wallet Users
With Liquidations 2.0, emphasis is being placed on ensuring humans can easily participate in collateral auctions. The smart contracts team plans to release an interface to enable users to bid using MetaMask. Additionally, MetaMask users will eventually be able to access DEXes and exchange aggregators that choose to integrate the Liquidations 2.0 system into their existing front ends.
Meeting the Growing Needs of the DeFi Sector
Liquidations 2.0 will enable the Maker Protocol to scale effectively, allowing MakerDAO to support the growing demand for Dai in the DeFi space.
Before voting on the proposal, learn more about Liquidations 2.0 by reading MIP45 and following the Liquidations discussion on the Maker Forum. To explore running a Keeper, read the Auction-Demo-Keeper documentation.