A Deep Dive into MakerDAO

MakerDAO is one of the oldest crypto projects/open-source project on the Ethereum blockchain and a Decentralized Autonomous Organization1 in the world. Created 7 years (In 2014) ago, it was the first project to create a stablecoin collateralized with cryptocurrencies, and that would prove to be a crucial tool that fueled the DeFi ecosystem. Simply referred to as Maker, this protocol aims to address issues stemming from volatility in the cryptocurrency market through its DAI stablecoin.

DAI was launched in 2017, and has since become an important building block for decentralized applications (dApps) that formed the wider DeFi movement over the past few years. To increase user adoption, DAI began supporting multiple collateral assets in November 2019, and its total value locked (TVL) has since grown to over $10 billion.

Unlike USDT or USDC, which are centralized stablecoins pegged against the USD, DAI is decentralized. It uses smart contracts to maintain the value of the crypto assets held as collateral. For users of the MakerDAO protocol, all they need is some ETH and a crypto wallet to start.

Understanding the Inner Workings of MakerDAO

The DAO in MakerDAO stands for Decentralized Autonomous Organization, which refers to entities that run without a central figure, with smart contracts enforcing the rules once certain conditions are met. In MakerDAO’s case, it runs a collection of smart contracts operating on the Ethereum blockchain, and users can trade using DAI in a peer-to-peer manner. Users can also participate in the protocol’s governance matters using the Maker Governance Token (MKR). As a result, Maker is a transparent, decentralized ecosystem that provides risk-free loans and stability in a volatile crypto world.

The Maker ecosystem runs on three tokens: DAI, a multi-collateral stablecoin pegged 1:1 with $1 worth of ETH and other crypto assets; MKR, a governance token that is used to vote on crucial protocol decisions like the DAI savings rate; ETH alongside other ERC-20 tokens like YFI, UNI, LINK, etc. that are used as collateral for loans, paying network fees, and to settle liquidations.

These assets allow the ecosystem to function securely without the need for external intervention. Therefore, anyone from around the world can borrow against their collateral without going through bureaucratic processes associated with traditional finance, and thus avoid dealing with painful intermediaries.

Understanding Collateralized Debt Position (CDP)

As a decentralized stablecoin, Maker uses some mechanisms to generate DAI tokens. One of these mechanisms is collateralized debt position (CDP), a smart contract serving as a margin account specifically designed to cater to Ethereum-based tokens. Thus, it can only hold ETH or other ERC-20 tokens as collateral to generate DAI tokens.

How Voting and Governance Works on MakerDAO?

By using MKR tokens, token holders can participate in governance if they wish to have a say in strategic key decisions. Through the governance portal, users can see the results of a given campaign, and the number of votes it has received. If the campaign gets the desired number of votes, it will be considered successful and integrated into the protocol. The decisions that are made through such campaigns impacts the entire system. For example, they can automatically affect the stability of the DAI by adjusting the rates of fees and the MKR liquidation ratio.

Those curious about the Maker project can refer to the protocol’s forum, where you can get all the information you may need about the project. You can also use the forum to get in touch with the larger Maker community, ask questions, suggest ideas, and so on. The forum is public and dedicated to governance and community development.

What Benefits does MakerDAO Offer?

There are three key benefits that MakerDAO brings to the crypto space. These include providing a decentralized lending protocol where users can put up collateral in ETH and other ERC-20 tokens and receive DAI, which can be used in DeFi protocols. The benefits of this have been mentioned earlier, including the ability to access loans without having to deal with intermediaries and KYC procedures.

The other benefit is providing low volatility, which cannot be understated for anyone who understands the volatility within the crypto market. DAI is pegged at a 1:1 ratio to the value of a dollar. This protects holders from downside should the market lose value.

Finally, the protocol has an emergency shutdown mechanism in place to protect its users in highly unpredictable and unforeseen circumstances. This mechanism serves as a last resort if the platform faces existential threats, such as the permanent failure of the voting system. Thus, it exists to protect users from incurring catastrophic losses. This is crucial, considering the number of people that have lost large sums from the collapse of decentralized stablecoins.

Does MakerDAO Have Any Drawbacks?

Yes. Unfortunately, since DAI is backed by ETH and other crypto assets, the stablecoin is more volatile than other stablecoins like USDT or USDC. Also, the stablecoin lacks the liquidity of its centralized counterparts. To mitigate the volatility of the assets that back it, borrowers have to deposit more collateral than the DAI they will receive.

Finally, there are always risks associated with dealing with DeFi protocols where you have to be vigilant or risk losing your funds.