A class-action lawsuit targeting DeFi cryptocurrency lender Maker has been thrown out by a US judge. The lawsuit had accused Maker of not clearly outlining the risks investors were exposed to, which supposedly led to significant collateral losses on MakerDAO in 2020.
A court filing from Wednesday revealed that the “Black Thursday” lawsuit was dismissed on the grounds that the Maker Foundation, responsible for constructing the Maker protocol and initiating the token supply, has been dissolved, rendering it an unsuitable defendant.
Established in 2018, the Maker Growth Foundation declared in 2021 that it was handing over all its operations to its decentralized autonomous organization, MakerDAO. This transition was always in the cards as part of the protocol’s planned journey towards complete decentralization.
Moreover, the judge pointed out the inadequacy of the plaintiff’s case, stating that the “plaintiff has not provided enough factual basis to back each of his claims for relief.” It’s noteworthy that this was the complaint’s second revised edition.
In March 2020, a class-action lawsuit was lodged against the Maker Foundation by investors who alleged that the organization failed to accurately represent the risks involved for investors within its ecosystem.
According to the complaint, holders of collateralized debt positions suffered losses amounting to $8.325 million. This occurred when the value of Ethereum, which Maker used as collateral, significantly dropped in relation to the DAI stablecoin in which the loans were denominated.
Peter Johnson was identified as the primary plaintiff in the lawsuit. The accusation claimed that the Foundation did not adequately communicate potential risks to its investors. The lawsuit stated:
“The Maker Foundation, while misleading CDP Holders about the real risks they were exposed to, either actively contributed to or, at the very least, allowed the circumstances leading up to Black Thursday. This was after aggressively inviting substantial investments into its ecosystem.”
At that juncture, Johnson stated his intention to seek damages “amounting to no less than $8.325 million, in addition to punitive damages of at least $20 million.”
Maker stands as a premier DeFi lending platform, permitting users to access loans in its proprietary stablecoin, DAI, by putting forward certain cryptocurrencies, such as ETH, as collateral.
For borrowers on the platform, maintaining a specific collateral threshold is mandatory to prevent their holdings from being liquidated. Given the volatile nature of cryptocurrency prices, Maker enforces an over-collateralization rule. This stipulates that borrowers are required to secure a value in assets that is greater than the debt they incur.
However, on March 12, 2020, a sharp decline in ETH’s value triggered a massive sell-off of the token. Due to an absence of competitive bidding, significant volumes of the token were acquired for nothing during key debt auctions. Some bidders capitalized on this and won liquidation auctions without offering any DAI in return.