Quantstamp, a blockchain security company based in San Francisco announced on April 4 that observes an emergent form of decentralized governance while securing the Maker syndicate Backstop Contract.
Due to extreme cryptocurrency market volatility, the Decentralized Finance, or "DeFi" community rallies to fill a shortfall in the Maker collateral by forming the DAI Backstop Syndicate, protecting the DAI stable coin.
On March 12, 2020, the stabilized digital currency using distributed computing and smart contracts known as DAI, fell off its peg of roughly $1 USD. This put the entire Decentralized Finance ecosystem of interlocking open finance tools critically at risk. At a recent peak in February 2020, over $1B USD in value was locked up in DeFi.
During extreme market volatility, blockchain transaction congestion and insufficient network parameters, the Maker system became overburdened by approx. $4.5M in undercollateralized "bad debt." To fill the shortfall, clear system debt and restore the DAI to its peg, the Maker Flop protocol triggered a mint and auction.
To protect the auction, the DeFi community rallied together forming the DAI Backstop Syndicate, collectively functioning as a "buyer of last resort." In what would typically be considered a governance-like action, this quick response from a decentralized group of ecosystem participants, users and competitors ensured that the DeFi ecosystem would stabilize and be protected for a continued prosperous future.
Quantstamp stepped in to quickly secure the syndicate software protecting the community assets and independently shore up network parameters during the auction with technical support from Maker. Quantstamp is also providing a smart contract coverage warranty via Chainproof to cover the value of the Backstop Contract to further help protect the DeFi community.
"It was inspiring to see the DeFi community rally together so quickly to form a 'buyer of last resort' syndicate, starting with only 1 DAI," said Richard Ma, CEO of Quantstamp. "This reduced the barrier to participation and helped stabilize the ecosystem—essentially an emergent form of community governance."
If these "buyer of last resort" bids are won by the decentralized syndicate, contributors receive network assets proportionate to their DAI bids. The auction set the minimum check size of 50k DAI greatly reducing participation. While the software and its funds were under a Quantstamp review for security, they observed that not only was the barrier to participation greatly reduced, but by allowing anyone to openly participate via the syndicate, a global community had spontaneously formed a backstop to a stateless currency.
These sorts of governance like actions, at this scale, are unheard of. This backstop, with over 400,000 DAI gathered, has community participation from enthusiastic #DeFi ecosystem members from the US, Italy, Argentina, China, and more.