Maker & DAI stress tests

How DAI worked (and broke)

Overcollateralized dollars on-chain

MakerDAO launched SAI (single-collateral DAI) in late 2017: lock ETH, mint DAI up to a collateralization ratio (e.g., 150%), pay a stability fee, and avoid a custodian. If your vault fell below the ratio, your collateral could be liquidated to repay the debt. It was dollar exposure without banks. The original SAI whitepaper ↗ laid out the mechanics.

DAI stability depended on price oracles, liquidation auctions, and keepers (bots) who bid on discounted collateral. Incentives aligned: holders wanted $1, vault owners wanted low fees, MKR holders managed risk and earned fees but were on the hook if the system went insolvent.

Collateral risks hiding in plain sight

ETH was volatile collateral. A fast crash could push many vaults under water simultaneously. Auctions needed bidders and block space to work. Oracle updates needed to be timely to avoid lagging prices. Everyone knew these risks in theory—few had seen them tested under extreme stress.

“Systems fail at their edges, not their centers.” — Common mantra in early DeFi risk chats

Black Thursday and the aftermath

March 12, 2020: gas spikes, bids disappear

On “Black Thursday,” ETH lost ~40% in hours while gas prices exploded. Liquidation auctions malfunctioned: some ran with zero or near-zero bids because keepers couldn’t get transactions mined, leading to “zero-bid” wins where vault owners lost collateral without repaying full debt. The system accrued an ~$8M DAI shortfall.

It was a chain reaction: price oracle updates lagged, vaults tipped into liquidation, gas wars sidelined keepers, and auctions cleared at distressed levels. The promise of overcollateralization met the reality of mempool congestion.

Recapitalizing with MKR mint

Governance triggered a debt auction: mint new MKR, sell it for DAI to cover the hole, diluting holders to keep DAI solvent. This was the social contract—MKR absorbs tail risk. The auction cleared, recapitalizing the protocol, but trust took a hit; users questioned auction design and oracle latency.

Pivot to multi-collateral and stables

Soon after, Maker moved fully to Multi-Collateral DAI (MCD) and added USDC, wBTC, and other assets. Stability fees and emergency shutdown parameters were tweaked. The community debated decentralization vs. resilience: adding USDC reduced volatility risk but introduced censorable collateral.

Governance, decentralization, and trade-offs

Oracle and keeper hardening

Maker improved oracle feeds with medianizers, faster updates, and security modules (OSM) to delay malicious pushes. Keeper infrastructure diversified; more bots and professional market makers joined liquidation pipelines. Auctions were redesigned to prevent zero-bid outcomes and to handle gas spikes better.

Decentralization vs. stability

Adding centralized collateral (USDC, later others) stabilized DAI but reduced its censorship resistance. Governance wrestled with how much real-world backing to accept. Risk frameworks emerged: debt ceilings, collateral factors, and circuit breakers aimed to quantify and cap exposure.

Lessons for all of DeFi

Black Thursday became a case study: oracles are critical infrastructure; gas spikes are a risk vector; auctions need backstops; and governance must be able to act quickly without being opaque. Many later protocols copied or adapted Maker’s mitigations.

Legacy

Maker & DAI proved crypto-native dollars could exist without a bank, but also that “decentralized” doesn’t mean “risk-free.” The protocol survived its stress test by diluting MKR and diversifying collateral. The scars shaped how DeFi thinks about solvency, oracles, and emergency powers.