Loan holders can close their debt positions on the MakerDAO lending platform below the 150% guarantee minimum thanks to a simple trick.
The discovery of the startup B.Protocol
A loophole in the collateralized debt position (CDP - invest) of MakerDAO, discovered by the Israeli startup B.Protocol, allows CDPs to close in a much more lenient way than the system allows due to a small oversight in the auction market, according to a post shared by the startup.
The lending protocol is intended to automatically close positions after the pending collateral backing (DAI) falls below 150%. But a simple call function provides a workaround by reducing the chance of receiving a penalty.
If the borrower splits CDPs into small positions around $ 100, showing B.Protocol's analysis, the Keepers - who bid on assets liquidated from under-collateralized positions - will not liquidate the positions due to difficulties in calculating the profit margin, said Yaron Velner, CEO of B. in an interview.
A position - large or small - could theoretically be held under the collateral limit for some time and closed without a liquidation penalty, he said. Exact values were not provided due to the anomalous nature of the problem; how long an extension lasts depends on the keepers who don't seem interested in purchasing small seats, Velner said.
“The extrapolation of these results to a $ 1 million vault suggests it will cost about $ 5.000 in commission to split it into 7.800 vaults. In other words, you could protect your Vault from future liquidation by sacrificing only 0,5% of its size, ”the post states.
This is compared to the typical 13% or more haircut that liquidated CDP holders typically incur when their debt / loan ratios fall below the minimum threshold.
Settlement heuristics
The discovery puts pressure on MakerDAO's liquidation markets, which have already been overseen by the community. The creation and destruction of the platform's native stablecoin depends on the self-executed Maker liquidations at the appropriate time.
However, as B.Protocol states, “It is not clear whether such a threshold exists”. Rather, Keepers is based on a vague "heuristic". “The main reason the small deposits weren't cleared is probably because the liquidators did not find it profitable to initiate the liquidation process,” the post states.
The discovery is B.Protocol's second discovery in recent weeks, the latest being the use of a flash loan on Maker's governance portal to close an election early (B.Protocol offers loan market liquidation products) .
The startup revealed the vulnerability to Maker's smart contract team, which is preparing options for community review on Nov.23, Velner said.
