MakerDAO is a decentralized autonomous organization that operates a protocol designed to maintain the stability of DAI, a cryptocurrency stablecoin pegged 1:1 with the US dollar. What sets it apart is that each DAI token is backed by collateral such as Ether (ETH) rather than relying on third-party guarantees. Since ETH is volatile, this creates unique challenges for maintaining DAI’s peg.
How MakerDAO Works
The MakerDAO protocol incentivizes a distributed network of participants to help sustain DAI. It’s a foundational element in the decentralized finance (DeFi) ecosystem and forms part of the broader Maker Protocol, which uses crypto assets to operate and stabilize DAI without relying on traditional banks or governments.
Two core tokens are essential to the Maker ecosystem: DAI and MKR.
- DAI is generated when users lock up cryptocurrency—like ETH—as collateral to take out loans in DAI. Borrowers can repay the DAI to reclaim their collateral, but they must ensure the collateral value doesn’t drop below a certain threshold to avoid automatic liquidation.
- MKR is the governance token that empowers holders to vote on proposed changes to the protocol. In essence, MKR tokens enable decentralized decision-making on issues such as which assets can be used as collateral, stability fees, and liquidation parameters.
At launch, 1 million MKR tokens were created. Holders can participate in key decisions through a process known as Executive Voting. Approved executive votes lead to changes in the protocol’s code.
Before an executive vote occurs, a Governance Poll takes place. This allows MKR holders to gauge community sentiment before implementing any technical updates. Although anyone can propose ideas via MakerDAO’s forums, only MKR token holders are eligible to vote. Voting power is proportional to the amount of MKR staked.
For example, if Proposal A receives support from 10 holders staking 1,000 MKR, and Proposal B is backed by 5 holders staking 5,000 MKR, Proposal B wins due to greater token-weighted support.
DAI Savings Rate
MKR holders also determine the DAI Savings Rate (DSR), which is the annual percentage yield paid to users who lock DAI into the platform’s savings module. The DSR has historically ranged from 0% to 8.75%.
During market downturns, for instance, MKR holders might set the DSR to 0% to encourage DAI selling, helping to restore its dollar peg.
Why Does MKR Have Value?
MKR accrues value as usage of the Maker Protocol grows. The token’s supply dynamics are deflationary when the system performs well and inflationary during periods of poor governance or market stress.
It’s important to note that there is no hard cap on the total supply of MKR. The token supply changes through two types of auctions:
- Surplus Auctions: When the system collects more fees from loans than needed, surplus DAI is auctioned off. Participants must purchase this DAI using MKR. The MKR used in these transactions is then burned, reducing the total supply and potentially increasing the token’s value.
- Debt Auctions: If the system suffers losses due to undercollateralized positions, new MKR tokens are minted and auctioned for DAI to recapitalize the protocol. This increases the MKR supply, which can negatively affect the price.
Thus, MKR holders are incentivized to govern responsibly to ensure system stability and encourage fee generation, leading to token burns. 👉 Explore advanced DeFi strategies
Who Created MakerDAO?
The Maker Protocol was created in 2015 by a development team led by Rune Christensen. The project was later formalized under the Maker Foundation, based in the Cayman Islands.
In 2017, the team raised $12 million through a token sale to venture firms including Andreessen Horowitz, Polychain Capital, and 1Confirmation. Andreessen Horowitz purchased an additional $15 million worth of MKR in 2018, expressing intent to participate in governance. In 2019, Paradigm and Dragonfly Capital Partners invested $27.5 million to support MakerDAO’s expansion into Asia.
Frequently Asked Questions
What is the main purpose of MakerDAO?
MakerDAO is designed to issue and manage DAI, a decentralized stablecoin pegged to the US dollar. It uses smart contracts and over-collateralization to maintain stability without central intermediaries.
How is MKR different from DAI?
DAI is a stablecoin used for transactions and savings, while MKR is a governance token that grants voting rights within the Maker ecosystem. MKR also helps stabilize the protocol through token burns and minting.
Can anyone participate in MakerDAO governance?
Only MKR token holders can vote on proposals. However, anyone can join community discussions and propose changes through MakerDAO’s forum.
What happens if my collateral value drops too low?
If the value of your collateral falls below the required threshold, it may be liquidated automatically to ensure the system remains solvent.
Is MakerDAO fully decentralized?
Yes, MakerDAO operates in a decentralized manner. Governance decisions are made by MKR holders, and the protocol runs on the Ethereum blockchain.
What factors affect the value of MKR?
MKR’s value is influenced by protocol usage, fee generation, governance decisions, and overall demand for the DAI stablecoin. Effective governance often leads to token burns, which can positively impact price.