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The MakerDao is a Credit Facility on the Ethereum Blockchain. The MakerDao is by far the biggest decentralized finance platform in existence. It is believed that on March 12th, 2020 there were over 683 million dollars in Ethereum deposited in the MakerDao The Ethereum blockchain is the birthplace of smart contract applications. Smart contracts are the backbone of decentralized finance. The MakerDao provides loans called collateralized debt products, which are used by Ethereum investors to increase their returns on investment. These collateralized debt products are the main product of decentralized finance. These CDP are debt borrowed against the value of Ethereum. On March 12th, 2020 the price of Bitcoin dropped from $9000 to $4000 and the Altcoins like Ethereum followed, shedding 50% of their value in one day.

So many of the collateralized debt positions on Ethereum which were over Capitalized when Ethereum was $200, were suddenly under capitalized debt positions when Ethereum hit $100. This type of market movement with sudden under capitalization of debt triggers margin calls in the stock market and liquidations at a DeFi Credit Facility. But liquidations are run differently on the MakerDao the Ethereum is auctioned off in a competitive bidding process that normally results in the best, or highest possible price for liquidated Ethereum.

But there was one huge problem. The bids are transactions. Ethereum reaches its transactional capacitance and smart bidders notice fewer and fewer bids making it through the transaction process. So the bidders did what any smart business person would do... in the absence of competing bids they bid very low. Sometimes zero dollars on accounts containing hundreds and even thousands of Ethereum. And in the absence of competing bids, these zero bids won. It was unbelievable and yet it was very believable.

This is what I think happened based on the many stories written by the event.

Later, after the smoke cleared Investors signed into their accounts expecting to have lost 50% of the Ethereum plus a liquidation charge of 13 percent. But instead they found that their accounts were at zero. Instead of competitive bidding the congestion on the Ethereum blockchain resulted in singular bids of zero dollars and because they were unopposed, the bids were executed.

Smart Contracts aren’t smart, but they are dependable. They sold to the highest bidder in an attempt to recover funds. But with zero dollar bids they liquidated not some but all the Ethereum in each account. They did exactly what they were programmed to do. They don’t think they execute. That’s why we love them and that’s why we fear them.

Shortsegments

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Posted Using [LeoFinance](https://leofinance.io/@shortsegments/the-day-the-smart-contracts-failed)