MakerDAO's Black Thursday: A Cautionary Tale in DeFi Risk

MakerDAO's liquidation mechanism relies on a crucial assumption: that competing bots will always participate in auctions to purchase collateral. However, on Black Thursday, Ethereum's network congestion prevented most keeper bots from bidding, creating a window of opportunity for one bot to collect millions worth of ETH without paying.

The incident occurred when hundreds of vaults went underwater due to the sudden 43% drop in ETH value. As gas prices skyrocketed and keeper bots struggled to respond, a single bot submitted bids of zero DAI and successfully acquired real ETH for free. This continued for nearly 40 minutes, resulting in the bot collecting $8.32 million in ETH before the network stabilized.

The aftermath of Black Thursday saw MakerDAO left with $4.5 million in bad debt. To cover this shortfall, MKR holders voted to mint new tokens and sell them into the market, diluting existing holders. The incident has had a lasting impact on DeFi risk design, with analysts noting that every major liquidation system built after 2020 traces its risk back to this 40-minute window.