The Auctions of the Maker Protocol

Introduction

The Multi-Collateral Dai (MCD) system within the MakerDAO Protocol is a decentralized smart contract platform on Ethereum designed to stabilize the value of Dai, its algorithmic stablecoin. It achieves this through a combination of Vaults, autonomous feedback mechanisms, and incentivized external actors known as Keepers.

This document explores the auction mechanisms central to the system, detailing how Keepers participate in these auctions to maintain system solvency and efficiency.

Core Auction Mechanisms

The Maker Protocol employs three types of auctions to manage surplus, collateral, and debt:

1. Surplus Auctions

   • Purpose: Auction surplus Dai (from stability fees) for MKR, which is subsequently burned.
   • Trigger: When Dai surplus exceeds governance-set limits.
   • Outcome: Reduces MKR supply, enhancing token scarcity.

2. Collateral Auctions

   • Purpose: Sell collateral from liquidated Vaults to cover outstanding debt.
   • Trigger: When a Vault’s collateral value falls below the liquidation ratio.
   • Outcome: Recover debt while penalizing undercollateralized positions.

3. Debt Auctions

   • Purpose: Mint new MKR to cover unresolved system debt.
   • Trigger: When collateral auctions fail to cover debt.
   • Outcome: Increases MKR supply, diluting holders proportionally.

👉 Learn how to become a Keeper

Auction Parameters and Design

Key Risk Parameters

| Parameter | Description | Example Value |
|-----------|-------------|---------------|
| beg | Minimum bid increment (e.g., 3%) | 3% |
| ttl | Bid duration (time limit per bid) | 6 hours |
| tau | Total auction duration | 24 hours |

Bid Dynamics

• Bids must increase by at least beg (e.g., 3% higher than the last bid).
• Auctions end if no bids occur within ttl or when tau is reached.

Detailed Auction Processes

Surplus Auction Workflow

1. Governance sets a Dai surplus threshold.
2. Keepers trigger the auction via flap transaction.
3. Bidders compete with escalating MKR bids.
4. Winning MKR is burned; surplus Dai is transferred to the bidder.

Collateral Auction Workflow

1. Unsafe Vaults are liquidated via bite transaction.
2. Collateral is auctioned in fixed lot sizes.
3. Initial bids cover debt; subsequent bids trigger reverse auctions (smaller collateral portions for fixed Dai).

Debt Auction Workflow

1. Triggered via flop when system debt exceeds limits.
2. Keepers bid decreasing MKR amounts for fixed Dai.
3. New MKR is minted to recapitalize the system.

👉 Explore advanced Keeper strategies

Keepers: The Auction Participants

Role:

• Monitor Vaults and trigger liquidations.
• Bid in auctions to earn collateral or MKR.
• Can be humans or automated bots.

Incentives:

• Profit from collateral discounts in Collateral Auctions.
• Earn newly minted MKR in Debt Auctions.

FAQs

How does the system ensure fair auction prices?

The beg parameter enforces competitive bidding, while ttl and tau prevent indefinite auctions.

What happens if no one bids in a Collateral Auction?

The system may escalate to Debt Auctions to cover the shortfall.

Can Keepers participate in all auction types?

Yes, but they must hold Dai or MKR to bid and comply with risk parameters.

Conclusion

The Maker Protocol’s auction mechanisms ensure system stability by dynamically balancing surplus, debt, and collateral. Keepers play a vital role in this ecosystem, acting as arbitrageurs and stabilizers.

For technical implementation:
👉 Auction Keeper Bot Setup Guide