Ethereum (ETH) collapses: panic and liquidations in sight on MakerDAO?

Liquidation wave approaching – MakerDAO is a decentralized finance protocol from Ethereum. This makes it possible to generate the stablecoin DAI in exchange for the collateralization of other cryptocurrencies. However, in times of intense market declines, the default of some large loans can lead to waves of liquidations.

The company peck shieldspecializing in blockchain security, has just brought to light a worrying situation on the MakerDAO protocol.

Indeed, following the fall in the price of ETH, currently around $1,300, many loans contracted on the protocol could fall into default.

Warning tweet posted by Peckshield regarding MakerDAO – Source: Twitter.

Thus, the value deposited as collateral would no longer cover the amount borrowed. In such a situation, the protocol will settle the loan default by liquidating the collateral. To do this, the collateral will be sold to cover the user’s loan.

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However, a 3.3 million DAI loan is currently on the verge of default. Indeed, it will be liquidated if the price of ETH were to fall below $1,284.

Unfortunately, reselling such a large amount of ETH could cause the price of ETH to drop momentarily. Such a fall could in turn trigger the liquidation of other loans, which in turn would impact the price of ETH, sending the protocol into a spiral of liquidation.

An event of this type had already been observed in March 2020. This episode had been called Black Thursday, and had led to the liquidation of hundreds of loans.

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