MakerDAO: Everything You Need to Know

Today, in an ever-changing world filled with dynamic applications and relentless technological advancements, financial ecosystems find themselves being on the cusp of a major internal revolution, spearheaded by the proposition of Decentralised Finance. DeFi, in fact, has come to encapsulate a whole new environment of alternative economic structures and financial paradigms, and is very likely destined to utterly disrupt the way people engage with money, value and traditional banking systems.

Apart from blockchain-enabled decentralised and trustless lending and borrowing protocols, among the many other DeFi-related things, it is important to emphasise the vital role played by stablecoins in the digital asset economy. This is because, without stablecoins, DeFi and the whole crypto space would not be able to function nor operate correctly. Of course, we are going to refer you Maker DAO, the decentralised platform through which anyone, anywhere can generate the DAI stablecoin against crypto collateral assets.

About MakerDAO

MakerDAO is an organisation developing technology for borrowing and savings, as well as a stablecoin crypto asset called DAI on the Ethereum blockchain. MakerDAO has created a protocol allowing anyone with ETH and a Metamask wallet to lend themselves money in the form of DAI stablecoin. By locking up some ETH in MakerDAO’s smart contracts, network participants can create a certain amount of DAI, with the more ETH locked up, the more DAI generated.

The Maker Protocol employs a two-token model, with the first being the collateral-backed DAI stablecoin, and the second being the protocol’s governance token MKR. The Maker Foundation, together with the MakerDAO community, strongly believe that a decentralised stablecoin is required for any individual or blockchain business to leverage and take advantage of the benefits offered by digital capital.

MakerDAO Protocol

MakerDAO is one of the largest, most well-established dApps on the Ethereum blockchain, and it holds a considerable percentage of the total liquidity in the DeFi ecosystem. In fact, when the Total Value Locked (TVL) of ETH in DeFi first surpassed the $1 billion mark in June 2020, around 60% of ETH was held by the MakerDAO protocol. Currently, at the time of writing, Maker stands in 5th position for Total Value Locked after Aave, Compound, InstaDApp and Curve Finance, with over $8 billion in assets locked on its platform.

MakerDAO’s Two-Token System

The Maker governance token, MKR, was created by the MakerDAO Protocol in order to essentially support the stability of the DAI stablecoin and enable governance for the DAI credit system. MKR is an ERC-20 asset running on the Ethereum blockchain and it can be minted or burned proportionally to how close the DAI stablecoin is to the US dollar.

This inherently means that the creation of MKR is dependent on the stability of DAI as a whole. For instance, if DAI remains stable, more MKR is burned decreasing the total supply, whereas, if DAI fluctuates too far from the 1 dollar peg, more MKR is minted subsequently increasing the total supply.

The DAI Stablecoin

The DAI stablecoin is the second monetary component in MakerDAO’s two-token model, after MKR. Stablecoins emerged as somewhat of a middle ground between the legacy financial market and the nascent digital asset one.

Tracking the value of fiat currencies while operating as cryptographic assets, these blockchain-based tokens were initially attractive to traders as a way to lock-in and realise their profits. At present, the most popular forms of stablecoins are fiat-backed ones such as USDC and USDT, which are typically collateralised by the US dollar, but commodity-backed stablecoins do also exist.

DAI’s Financial Properties

  • As an Ethereum-based stablecoin, DAI is designed to perform 4 main functions in the broader crypto space and, more specifically, in the MakerDAO ecosystem. These functions include:
  • Store Of Value: With DAI being a stablecoin, it can function as a store of value by preserving relative stability in the volatile crypto markets.
  • Medium Of Exchange: The DAI stablecoin is widely used across the crypto and DeFi space as an efficient medium of transaction and exchange.
  • Unit Of Account: DAI has a target price of $1, as it is softly-pegged to the US dollar. Within the MakerDAO protocol, DAI functions as the go-to unit of account.
  • Standard Of Deferred Payment: DAI is used to settle debts in the MakerDAO protocol.

Maker Collateral Vaults

DAI is generated and kept stable through the collateral assets deposited into Maker Vaults on the MakerDAO Protocol. Maker’s collateral assets are ERC-20 tokens which have been voted on and approved by MKR token holders through governance.

In order for an ERC-20 token to be accepted as collateral on Maker, MKR holders must first approve its Risk Parametres and deem it a safe asset for collateralisation. Network participants can generate DAI by opening a Maker Collateral Vault via MakerDAO’s Oasis App dashboard and depositing collateral.

Bottom Line

MakerDAO is one of the largest, most well-established dApps on the Ethereum blockchain, and it holds a considerable percentage of the total liquidity in the DeFi ecosystem. With its two-token model, MKR and DAI, MakerDAO allows pretty much anyone around the globe to gain access to economic empowerment through its trustless, permissionless, DAO-like financial platform.

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