ETH money markets process $200M in liquidations in one day

By: Daniela Kirova
Daniela Kirova
Daniela has been writing translating cryptocurrency and investment content for more than 15 years. Her experience includes ghostwriting portions… read more.
on Jan 25, 2022
  • MakerDAO collected about $15.5 million in liquidation penalty fees
  • On MakerDAO, users put ether as collateral and borrow DAI, the market’s stablecoin
  • The ether is sold for DAI when a position is liquidated, the DAI is burned to maintain stablecoin value

As ether lost more than 14% on Friday, its biggest single-day drop in more than half a year, it triggered liquidations of collateral locked in decentralized money markets, some of which made an impressive profit off liquidation fees, CoinDesk wrote.

MakerDAO liquidated over 50% of the amount

Ethereum (ETH/USD) money markets MakerDAO, AAVE (AAVE/USD), and Compound (COMP/USD) processed a total of $200 million of liquidations on Friday, a record amount for a single day. Normally, these DeFi protocols don’t see more than $10 million of liquidations per day.

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How does liquidation work?

Liquidation occurs when a cryptocurrency crashes and the value of the collateral is pushed below the safety threshold. On Friday, MakerDAO collected about $15.5 million in penalty fees, bringing its total earnings from liquidation in January to $17.5 million.

Analysts at Delphi Digital, who compiled the data, commented:

As a major correction sent ETH falling from $3,200 to $2,500 in the past week, on-chain liquidations surged as positions started to hit their liquidation point.

On the subject of the earnings of MakerDAO, they added:

That’s multiples more than recent months and surpassed the revenues generated during the May 2021 drawdown.

On MakerDAO, users put ether as collateral and borrow DAI, the market’s stablecoin, in an amount equivalent to part of the collateral’s value. When they want to withdraw their ether, they must pay back the DAI along with the loan interest.

The collateral value has to be bigger than the loan amount. The borrower must deposit 150% of the loan as collateral in ether or any other token approved by MakerDAO.

When is a penalty owed?

If the collateralization ratio falls below 150%, the borrower has three choices: repay the DAI, add more collateral, or become liquidated. In the third case, they owe a penalty that is added to their total debt, calculated as a percentage of the debt.

How is the balance maintained?

The ether is sold for DAI when a position is liquidated. The DAI is then burned, or destroyed. This is what maintains the 1:1 balance (peg), exerting upward pressure on the price of DAI and downward pressure on ether. High liquidations provoke price volatility.

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