The cherry trees were starting.

It had happened over the course of three or four days - a few isolated branches in the south end of the park, then more, then almost overnight a thousand small white explosions all at once, and now in the first week of April we walked under them on the way to the bench. People were everywhere. Tarps spread under the trees. Bento boxes. Beer cans. The annual brief delirium of hanami already in motion, a full week earlier than the long-term average.

The bench was empty. We were the first ones on it.

Moolah arrived ten minutes after we did. She had a latte for the first time in weeks. She sat down. She did not say anything for a long moment.

"Today's story," she said, "happened several years ago last month. I was, that day, in a river in Chiba, watching price charts on the phone of a programmer I had befriended. I had been telling him for weeks that he should be more careful with his collateral. He had not listened. By the end of that day he had lost most of what he had. He was not the only one. Thousands of people lost something on March twelfth, 2020. The protocol they were using nearly died with them. It is one of the more important days in DeFi history, and outside this industry, almost nobody remembers it."

She took a long sip of her latte.

"Has anyone heard of MakerDAO?"

"It came up in Episode Four," I said. "DAI. The crypto-backed stablecoin."

"Good memory. MakerDAO is one of the oldest DeFi protocols still running. It launched in late 2017. Its function is simple - let people deposit ether as collateral, and in exchange, mint a stablecoin called DAI that is supposed to be worth exactly one US dollar. If your collateral falls below a certain ratio, the protocol auctions it off to liquidators to keep DAI fully backed. It works in calm markets. It worked, more or less, every day for two years. By March of 2020 it held hundreds of millions of dollars in collateral and was considered one of the safest, most battle-tested protocols in the entire industry."

"And then?"

"And then a virus you may remember swept the world."

She paused. The hanami crowd was a few yards away, laughing. The contrast was strange.

"On March eleventh, 2020, the World Health Organization declared COVID-19 a pandemic. The next day - March twelfth, Black Thursday, as it would come to be known in DeFi - the global financial markets collapsed in a way that had not happened in living memory. The S&P 500 dropped almost ten percent. Oil dropped more. Bonds, gold, currencies - everything moved at once, in directions nobody had predicted. And ether - which had been around two hundred and forty dollars at the start of the day - fell by almost half in less than twenty-four hours."

I tried to picture it. I was in college and I remembered the lockdowns. I did not remember the markets specifically. I had not yet known to look.

"For MakerDAO, this was a stress test of a magnitude its designers had not modeled. The collateral that was backing every DAI in circulation was suddenly worth half what it had been the day before. Thousands of positions crossed their liquidation thresholds at the same moment. The auctions that were supposed to sell off the collateral, in an orderly way, all began firing at once. And the system started to fail."

"How?"

"Three things went wrong simultaneously. The first was oracle lag. Remember the oracles - the messengers from outside? MakerDAO's price feed updated every few minutes, with a small delay built in for safety. On any normal day this delay was invisible. On March twelfth, the price was moving so fast that by the time the oracle reported a number, the real market was ten or fifteen percent lower. The protocol was making decisions about liquidation based on prices that were no longer real. The bank teller was reading yesterday's headlines."

"And the second?"

"The second was gas. The Ethereum network, on Black Thursday, became completely congested. Every trader in DeFi was trying to act at once - closing positions, moving collateral, withdrawing from protocols. Gas fees, which we have discussed, became enormous. Hundreds of dollars per transaction at the peak. Many users who tried to add collateral to save their positions could not get their transactions through. They watched, in real time, as their gas-priority bids were outbid by other panicked users, and as their collateral fell below the threshold, and as their positions were liquidated. The system was working as designed. The users were locked out of saving themselves."

"And the third?"

"The third was the worst." She took another sip of her latte. "MakerDAO's liquidation auctions were designed to give bidders ten minutes to compete for the collateral being sold. In normal conditions, multiple liquidator bots would bid against each other and the price would settle at something close to fair market value. On Black Thursday, the network was so congested, and the prices were moving so fast, that most liquidator bots either failed to submit transactions or submitted them and had them stuck in the queue for so long that the auctions completed before competing bids arrived. Some auctions had only one bidder. And the bidder - knowing they were unopposed - bid zero."

"Zero."

"Zero DAI for ether worth, at the time, around a hundred and twenty dollars per coin. The auction code was supposed to require some minimum bid, but the way it was written, a bid of effectively zero - a single wei, the smallest unit of ether - was technically valid if no other bid arrived in time. So a small number of liquidator bots, taking advantage of the chaos, walked away with millions of dollars of ether collateral for almost nothing. The owners of that collateral lost everything. The protocol received almost nothing in exchange. And MakerDAO itself was suddenly undercollateralized - it had issued more DAI than it had backing for. The stablecoin was insolvent."

"How much?"

"About five and a half million dollars of bad debt. Which does not sound like much in today's terms, but for MakerDAO at the time, it was an existential threat. If the community could not cover that hole, every DAI in circulation was no longer fully backed. The whole premise of the stablecoin would collapse. Trust would evaporate. The protocol could die. The entire DeFi ecosystem, which depended heavily on DAI, could cascade from there."

"What happened?"

"What happened next is one of the more interesting moments in DeFi governance, and a quiet vindication of the very system we discussed in Episode Fourteen. The MakerDAO governance, with its token-weighted votes and its imperfect democracy and its handful of delegates, met under emergency conditions and decided to do something unprecedented. They printed new MKR tokens - the governance token of the protocol, now it’s called SKY, by the way - and auctioned them off in exchange for DAI, which was then used to plug the hole. In doing so, they diluted every existing MKR holder. The holders, in voting for this, were voting to take a personal loss in order to save the system. And they did it."

"They diluted themselves on purpose?"

"They diluted themselves on purpose. The price of MKR fell sharply. The existing holders absorbed the cost. The protocol returned to full collateralization within a few weeks. DAI held its peg. Confidence, eventually, returned. The system survived because the people who owned it agreed to be hurt in order to save it. There is a version of this story where they refused, and the protocol failed, and DeFi as we know it took a dramatically different shape from there. They did not refuse. The community of strangers, voting through a smart contract, agreed to take the punch on behalf of the system. I have never been more impressed by collective behavior in this space than I was that month."

I wrote in the notebook. Black Thursday - March 12, 2020. ETH crashed 50%. Three failures: oracle lag, gas congestion, zero-bid auctions. ~$5.5M bad debt. MKR holders voted to dilute themselves to recapitalize. System survived.

Dev had been quiet. He looked up from his coffee. "What did the protocol change after that?"

"Everything." Moolah counted on her paw. "First - they redesigned the liquidation auctions. The new system uses dutch auctions - the price falls steadily over a few minutes from a high starting bid, and the first bot to accept any price wins. Much faster. Much harder to game with congestion. Second - they added more oracles, with more sources, and tightened the latency. The messenger was made faster and more reliable. Third - they introduced what they called emergency shutdown, a mechanism the community could trigger to freeze the protocol if a crisis like this happened again. The blast door. Fourth - they expanded the kinds of collateral the protocol accepts, so that no single asset's collapse could threaten the system as severely. Diversification. Fifth - they began holding what they called cover capital, a small reserve of MKR that could be auctioned in emergencies without diluting the main supply. The lessons are written into the protocol now. The protocol remembers."

"Has anything like Black Thursday happened since?"

"Smaller versions. Several. None on quite that scale, partly because of the changes made afterwards. The May 2021 crash. The Terra collapse - which I will tell you about next week. The FTX moment in November of 2022. Each time, MakerDAO has been stress-tested. Each time, it has held. The lessons of Black Thursday have, in their way, made every subsequent crisis less catastrophic. The scar tissue is what keeps the body alive."

A wind came up. Cherry petals began to drift down - the first I had seen of the season, a few weeks before the great fall of them was due. They landed on the bench, on Moolah's fur, on my notebook page where I had been writing. I caught one and pressed it flat against the page. It would dry there over the next few days, almost transparent.

"There is one more thing I want to say," Moolah said quietly. "About the people on the other side of this story. The ones whose collateral got auctioned off for nothing. Some of them lost their savings. Some of them lost more than they had. The protocol survived; many of them did not, financially. There was a lawsuit, eventually. A class action. It was settled, partially, several years later. Not for the full amount. The MakerDAO Foundation paid some of it. The protocol contributed more. The settlement was, in the end, accepted by most of the plaintiffs. But the people who were liquidated at zero on March twelfth, 2020, did not, ever, get back what they lost. The system survived because they paid for it, alongside the MKR holders, against their will."

"That's not in the official story."

"It's not. The official story is that MakerDAO weathered its first major crisis through decentralized governance and brave collective action. Which is true. The second story is that the cost of that survival was distributed unevenly, and that the people who paid the most were the ones who had the least say in deciding to pay it. Both stories are true. Both deserve to be told. I am telling you the second one because the first one is told everywhere, and the second one is told almost nowhere. The history of DeFi has many footnotes that nobody reads. Today I am reading you one of them."

I sat with that for a while. The hanami crowd had grown louder. Somewhere, a guitar had started.

"The lessons?" I asked.

"Many. The system is only as fast as its slowest oracle. The system is only as resilient as its worst day. The cost of failure is borne unevenly. Governance can act bravely, but governance only acts after the harm is done. The participants who lost the most were the ones who could not get their transactions through during the worst congestion the chain had ever seen. The wealthy could pay their way out. The rest could not. That, more than anything else, is the part of Black Thursday I want you to carry. When the system breaks, it breaks asymmetrically. The ones with resources survive. The ones without get liquidated. The egalitarian dream of DeFi runs into the math of network congestion, and the math always wins."

I wrote that down and circled it.

The petals continued to drift. The crowds continued to laugh. In the river in Chiba, five years before, an otter had watched a programmer lose everything on a stranger's phone and had remembered it well enough to tell us, now, with the bench warm under us and the trees blooming early.

"Same place next week," she said. "I will tell you about Terra. The story I have been promising you all winter. Wear something warm. The forecast says cold."

She slipped off the bench and padded toward the pond. Halfway there, she paused, looked back, and said the thing I would think about for a long time afterwards.

"I lost a friend in May of 2022. Not literally - he is alive. But his life ended in some real sense, and he has not been the same since. Next week's story is partly about him. I am telling you that now so that when you hear it, you understand why I am telling it slowly."

She slid into the water.

I closed the notebook. The cherry petal pressed inside it would still be there, weeks later, when I went back to read these notes again.

Next: Terra / Luna (2022) - The Stablecoin That Wasn't