Global Settlement

Employed a Global Settlement mechanism in its earlier v2 system to protect the protocol and its synthetic assets (Synths). The process involved:

• Suspending exchanges and new Synth minting.
• Setting a final snapshot price for all Synths via Chainlink oracles.
• Allowing holders to redeem their Synths for a proportional share of the locked collateral (SNX) in the system, effectively unwinding all positions.

Global Settlement is not automatic; it requires a specific trigger. Common catalysts include:

• Governance Vote: A decentralized autonomous organization (DAO) vote to voluntarily shut down the system.
• Emergency Oracles: A multi-sig or trusted oracle signaling a critical failure (e.g., prolonged oracle freeze, severe attack).
• Circuit Breakers: Automated triggers based on predefined conditions like extreme collateral volatility or debt ceiling breaches.

It's crucial to distinguish Global Settlement from routine liquidations:

• Scope: Liquidations are granular, targeting individual undercollateralized positions. Global Settlement is systemic, shutting down the entire protocol.
• Frequency: Liquidations are frequent, automated events. Global Settlement is a rare, last-resort action.
• Goal: Liquidations preserve protocol solvency by auctioning collateral. Global Settlement terminates the protocol by enabling final redemptions.

The post-trigger redemption process is the core user action. It typically involves:

• A time window where users can submit claims to exchange their stablecoins or debt tokens for underlying assets.
• A fixed price (the "redemption price") calculated at the settlement block, eliminating future price risk.
• Direct settlement from the protocol's collateral pool, bypassing normal market mechanisms like AMMs or order books.

Implementing Global Settlement involves significant design considerations:

• Finality vs. Continuity: It provides ultimate user safety but destroys the functional protocol.
• Oracle Dependency: The fairness of settlement is critically dependent on the integrity and liveness of the final oracle price feed.
• Coordination Costs: It requires users to actively claim redemption within a set period, which can be a burden.

Global Settlement is triggered by a governance vote or an emergency oracle when the system faces an existential threat. Common triggers include:

• A prolonged oracle failure that prevents accurate price feeds.
• A critical security breach or hack of the core protocol.
• A severe, long-term market collapse that threatens the collateralization ratio of the entire system. This action is irreversible and moves the protocol into a final settlement state.

Once triggered, the system freezes and allows users to directly redeem their collateral. The process involves:

• Price Freeze: A final Collateral Auction price is set using the last reliable oracle data.
• DAH Redemption: DAI holders can exchange 1 DAI for a fixed amount of the underlying collateral (e.g., ETH), based on the frozen price.
• Vault Settlement: Vault owners can claim any excess collateral remaining after their debt is covered. This ensures all claims are settled fairly based on the system's final state.

The primary purpose of Global Settlement is to mitigate systemic risk and protect the protocol's ultimate backstop: its collateral. It acts as a circuit breaker to prevent:

• A bank run on DAI if confidence is lost.
• The protocol from becoming insolvent due to undercollateralization.
• The need for perpetual debt auctions in a failing market. By guaranteeing a final, orderly shutdown, it provides a clear worst-case outcome, which paradoxically strengthens confidence during normal operation.

While protective, Global Settlement introduces specific risks:

• Price Slippage Risk: The frozen redemption price may be worse than the live market price at the time of settlement.
• Liquidity & Timing Risk: Users must actively claim their collateral within a set period, potentially facing gas wars or network congestion.
• Protocol Dependency Risk: All integrated apps and services relying on DAI or Maker vaults would immediately cease functioning, causing cascading disruptions across DeFi.

The power to trigger Global Settlement resides with Maker Governance (MKR token holders) or a predefined set of Emergency Oracles. This creates a centralization tension:

• Governance Attack Vector: A malicious actor gaining control of enough MKR could trigger settlement maliciously.
• Oracle Manipulation Risk: Attackers could potentially corrupt oracle feeds to force a false trigger.
• Decision Paralysis: In a real crisis, governance may be too slow to act. The system relies on these actors to act as responsible fiduciaries.

Global Settlement differs from other DeFi stability tools:

• vs. Liquidation: Liquidations are continuous, automated processes for individual undercollateralized positions. Global Settlement is a one-time, system-wide termination.
• vs. Rebase Mechanisms: Protocols like Ampleforth adjust token supply to target price. MakerDAO fixes the supply and settles claims against static collateral.
• vs. Pause Functions: Many protocols have timelocked pause functions. Global Settlement is a permanent, non-pausable end state. Understanding this distinction is key for risk assessment.

A protocol-level function, often in decentralized finance (DeFi), that freezes a system to allow users to redeem their collateral at a fixed price. It is the primary action that initiates a Global Settlement process, halting new operations to enable an orderly wind-down.

• Purpose: To protect user funds when a protocol is compromised or fails.
• Trigger: Typically activated by governance vote or a trusted oracle in extreme scenarios.
• Example: The MakerDAO system uses Emergency Shutdown to settle all outstanding Dai debt against locked collateral.

The irreversible confirmation of a transaction or state change on a blockchain. Global Settlement requires economic finality—the guarantee that the settled state cannot be reversed—to be effective.

• Types: Includes probabilistic finality (e.g., Bitcoin) and absolute finality (e.g., Tendermint-based chains).
• Importance for Settlement: A settlement event must be final to prevent double-spending of redeemed assets.
• Mechanism: Often achieved through a sufficient number of block confirmations or a finality gadget.

A service that provides external, real-world data to a blockchain smart contract. In the context of Global Settlement, a price oracle is critical for determining the fixed redemption value of assets.

• Role: Supplies the reference price (e.g., ETH/USD) used to calculate final collateral payouts.
• Failure Mode: Manipulation or failure of the oracle can be a trigger for initiating an emergency shutdown.
• Security: Decentralized oracle networks like Chainlink are designed to provide tamper-resistant data feeds for such critical functions.

A process for liquidating undercollateralized positions to cover bad debt. This is the standard liquidation mechanism that is suspended during a Global Settlement, which instead uses a fixed-price redemption.

• Normal Operation: Auctions sell collateral to cover debt from risky positions.
• Contrast with Settlement: Auctions are dynamic and market-based; Global Settlement is static and uses a pre-defined snapshot price.
• Purpose: Highlights the difference between routine risk management and catastrophic failure protocols.

A protocol parameter that limits the total amount of debt (e.g., stablecoin supply) that can be issued against a specific type of collateral. Reaching or breaching this limit can be a risk factor leading to Global Settlement considerations.

• Risk Management: Acts as a circuit breaker to prevent over-exposure to a single asset.
• Governance: Often set and adjusted by decentralized governance.
• Systemic Risk: A global settlement may be required if a collateral type fails while at its debt ceiling, creating unmanageable systemic risk.

The decentralized process by which token holders propose and decide on changes to a protocol. Activating an Emergency Shutdown to begin Global Settlement is typically executed through a governance vote.

• Execution: A formal proposal is submitted, debated, and voted on by governance token holders.
• Quorum & Majority: Requires a predefined threshold of participation and approval to pass.
• Example: In MakerDAO, MKR token holders vote to trigger an Emergency Shutdown, locking in a final oracle price for redemptions.