Clear DefinitionsDebt Auction (e.g. Maker's DSR auctions)
1 min read
Pronunciation
[det awk-shun]
Analogy
Like a bank auctioning seized properties to recover unpaid loans, offering them below market value to cover losses.
Definition
A mechanism where undercollateralized debt positions are auctioned off to bidders who cover the deficit in exchange for protocol tokens or collateral at a discount.
Key Points Intro
Debt auctions restore protocol solvency by transferring bad debt to willing bidders.
Key Points
Auction trigger: Underwater positions or negative surplus initiate auction.
Bidding asset: Bidders offer stablecoin or governance tokens to cover debt.
Reward: Winners receive collateral or protocol tokens at discounted rates.
Settlement: Smart contracts transfer assets and adjust protocol balances.
Example
MakerDAO’s DSR auction sells MKR tokens to cover shortfalls in the Dai Savings Rate buffer when expenses exceed income.
Technical Deep Dive
Auction smart contracts maintain debt bids in a sorted list. On `startAuction()`, debtLot and bidLot parameters set initial sizes. Bidders call `kick()`, `tend()`, and `dent()` functions to outbid previous offers. On close, `deal()` finalizes transfers.
Security Warning
Flash loan attacks can manipulate auction prices; include minimum bid increments and time buffers.
Caveat
Low participation can lead to poor price discovery; incentivize bidders appropriately.
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