MakerDAO Explained: Maker Coin MKR & DAI stablecoin

Den W. Den W. 16 February
MakerDAO Explained: Maker Coin MKR & DAI stablecoin

Those of you who have been involved in  cryptocurrency since late 2018 will likely   have seen how the DeFi industry has grown from  an experimental corner of the crypto world,   to the huge and complex  ecosystem that it is today,   with a massive 22 billion dollars worth of  total locked value. And there’s one project   in particular that can be considered  the Grand-daddy of DeFi: MakerDAO.

Launched in 2017, MakerDAO is basically a digital  vault system where users can deposit a number   of Ethereum-based cryptocurrencies and use them  to mint DAI, the native stablecoin of the Maker   ecosystem.

Think of it as going to the bank to  get a loan, but without having to ask permission,   or do the boring stuff like providing  documentation or boosting your credit rating. Instead of requiring trust, the loan itself is  protected by the value of the assets you deposit,   which, in the case of Maker’s first  asset, Ethereum, has to stay above 150%   of the value of the DAI  dollars that you have borrowed. A sudden drop in the price of Ethereum could  see your ‘collateral level’ drop below 150%,   and liquidation of your precious  digital assets start to occur. For this reason, users of Maker vaults are  recommended to keep this collateralization rate   as high as possible, to mitigate  against potential loss of funds.

The real genius of Maker is that the system uses  the opening, closing and liquidation of these   Collateralized Debt Positions as a mechanism to  keep the DAI stablecoin at or close to it’s 1   dollar ‘peg’, ensuring that it’s value stays  the same without any centralized interference. This innovative solution made DAI the first  decentralized stable coin on the market,   and for that reason it has a lot of support and  functionality across the entire crypto industry.

Aside from its role within the Maker  ecosystem, DAI is also used as a trading   pair and as a stablecoin that gives  holders generous rewards in lending,   saving and farming across a suite of  defi applications like Compound and Aave.

More recently, DAI’s use case also  includes being a popular currency   for the purchase of NFTs and digital  art, integration into gaming platforms,   and for e-commerce businesses  like Shopify and WooCommerce. During a recent celebration of the  minting of over 1 billion DAI tokens,   Maker CEO and founder Rune Christensen said:  “One billion Dai in circulation is a powerful  validation that people around the world want   more access, more opportunity, and  more control over their finances.”

It hasn’t always been an easy ride for Maker  DAO. In March 2020, the price of Ethereum   and most other cryptocurrencies took a huge  tumble, after the financial crisis triggered   by the emergence of the Coronavirus. This  caused a series of liquidations on Maker,   which were exasperated by congestion on the  Ethereum network, as users scrambled to close   or shore up their debt positions. This led to  a host of problems which centered mostly around   the failure of the liquidation process, leaving  the platform with some unhappy users, 4 million   dollars worth of undercollateralized DAI, and  a temporary loss of DAI’s one dollar price peg. Maker responded quickly though and implemented  a number of efficient solutions that included an   improved liquidation mechanism and a number  of stable coins as accepted collateral in   maker vaults, making it easier for users  to increase their collateralization rate   in a volatile market.

It has also  introduced ‘multi-collateral DAI’,   which allows users to deposit a  host of other Ethereum-based assets,   such as Basic Attention Token, Kyber Network  and 0x, at a collateralization rate of 175%.

As a decentralized automnomous organization  or DAO, Maker allows anybody to propose   governance votes to seek improvements for the  protocol. But only those who hold the MKR token   can actually participate in voting, which may be  one reason why a number of venture capital funds   have strategically acquired significant chunks  of the MKR supply.

MKR holders also benefit   indirectly from helping to grow and improve  the functionality of the platform; user fees   are collected in DAI and then used to buy MKR,  which is then burnt, reducing the overall supply.

There is huge support for Maker DAO and the whole  decentralisation ethos of open access to finance.   This is reflected by the fact that Maker  is still the DeFi protocol with the most   value locked into it, at 4.3 billion dollars.  And due to their first-mover advantage,   the expanding DAI ecosystem, and the obvious  benefits of leveraging crypto savings   during a bull market, that number  isn’t likely to drop any time soon. The problems faced by Maker in March 2020  appears to have made it only more robust. What do you think of Maker and Dai? 

Do you feel more comfortable with   stablecoins pegged to crypto or those  backed by US Dollars in a bank account?   Let us know your thoughts in the comments.

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