Ethereum price drops losing more than 18% value under two hours due to collateralized stablecoin DAI. The stablecoin managed to maintain its peg to the United States dollar falling from $190 to $155 on Tuesday.

The sudden Ethereum price drops to highlight the weakness of DAI stablecoin built by the maker of MakerDAO, Dai (DAI) with the decentralized finance (DeFi) ecosystem within the platform. As of publishing time, Ethereum holds a price of about $170.

Higher transaction fees

DeFi Saver tweeted that due to heavy congestion in the Ethereum network it “struggled to execute all needed Collateralized Debt Position (CDP) ratio adjustments in time.”

Collateralized Debt Position (CDP) is “a type of loan administered by a smart contract central to the functioning of the DAI stablecoin.”

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So far only ETH is accepted as a collateral for opening CDP even though MakerDAO is planning for adding other assets in its platform.

Collateralized Debt Position (CDP) helps in the creation of Dai against collateral which will be held until the DAI is returned.

The firm tweeted that:-

“MakerDAO has a mechanism in place that automatically liquidates CDPs once their collateralization ratio has dropped below 150%.”

An independent service is provided by the company that prevent the “automatic CDP liquidation built on top of MakerDAO’s ecosystem.”

Even though the company admits that due to transaction fees and network congestion the system  “failed to protect 2 monitored CDPs, which have been liquidated in the process.”

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The company did announce that it will compensate the two users who were affected by the malfunctioning while adding:

“Although our automated protection is still in beta, our team is disappointed to have let some of our users down and we are willing to recuperate the losses suffered. […] We ask the owners of these two CDPs to please reach out.”

Optimism

The company noted that “20 unique CDPs have been automatically protected by the system during this recent crash.”

When it was pointed out to Andrea Andreas Antonopoulos, author of Mastering Bitcoin that the current DeFi ecosystem is not working properly.

“Not really. It seems like DAI maintained the price parity, the CDP protection contracts worked in all but two cases. This was a good test and things worked pretty well.”

Andreas Antonopoulos, author of Mastering Bitcoin

The company, later on, went to say that the current automation is working properly due to adjusting to the current transaction fees.

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