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.