What is MakerDAO? DAI Detailed Guide
Some of the popular digital assets such as Bitcoin (BTC) and Ethereum (ETH) are too volatile so as to be used as an everyday currency. The Bitcoin value often experiences varied fluctuations, rising or falling by as much as 25% in a single day and sometimes rising over 300% in a month.
The Dai Stablecoin value is stable relative to the US Dollar. It is further a cryptocurrency that is backed by the collateral. To realize the full potential of blockchain technology, it is believed that stable digital assets like Dai Stablecoin are essential.
In this article, we will provide you the complete guide of the Maker DAO protocol. Let us look into this review in detail now,
What is MakerDAO?
MakerDAO is an open-source project which was created in 2015. It is completely built on the Ethereum blockchain and a Decentralized Autonomous Organization. The project is managed by users around the world who hold its governance token, MKR.
The MKR holders are able to manage the Maker protocol and also the financial risks associated with Dai, in order to attain its stability and efficiency. This is achieved through the governing systems which involve Governance Polling and Executive Voting. The voting power is dependant on the value of the MKR being staked by the user in the voting contract, DS-Chief.
The Maker Protocol is also commonly referred to as the Multi-Collateral Dai (MCD) system. By leveraging the collateral assets, it allows the users to generate Dai. MakerDAO is the company that introduced the Dai stable coin. Coming to the MakerDAO price, Similar to Tether, Dai is valued at 1 USD. While compared to Tether, Dai is a crypto-collateralized stable coin.
Background
MakerDAO was founded in 2015 by Rune Christensen. It has its headquarters located in Santa Cruz, California. In 2018, MakerDAO received around $15 million of the capital from Andreessen Horowitz. He had bought about 6% of the total Maker (MKR) in circulation.
Now, Running on the Ethereum blockchain, MakerDAO is the longest-running project. MakerDAO has over more than 2.3 million Ethereum in its protocol. This constitutes about 2% of the total Ethereum in circulation.
Currently, the MakerDAO team includes about 11 members. Some of the core members of the team are Steven Becker (COO), Andy Milenius (CTO), Soren Peter Nielsen (Head of product), and Jacek Czamecki (General Counsel).
How MakerDAO Works?
In order to interact or create Dai on the Maker platform, the user has to leverage the Ethereum in the unique smart contract of the Maker system. These are generally known as Collateralized Debt Positions (CDPs). Pooled Ether (PETH) is the only collateral type that is accepted currently on the Maker Platform. In order to obtain Dai from a CDP, a user must first convert his or her Ether to PETH.
There are four stages involved in the interaction with the CDP. These can be described as below:
Step 1: Create and Collateralize a Vault: A user initially sends a transaction to Maker to create a CDP. Then the user must send his or her PETH to collateralize the CDP. Once funded, a Vault is considered collateralized.
Step 2: Generate Dai from the Collateralized Vault: A transaction is initiated by the vault owner, and then confirms it in the user’s cryptocurrency wallet. In exchange for keeping the user’s collateral locked in the Vault, a specific amount of Dai is generated.
Step 3: Pay Down the Debt and the Stability Fee: To get back a portion or all of the collateral, a Vault owner must completely pay back the Dai the user-generated, plus the Stability fee that continuously accrues on the Dai outstanding. Stability Fees must be paid in MKR while outstanding debt can only be paid back in Dai.
Step 4: Withdraw Collateral: The Vault owner can withdraw all or some of her collateral back to the wallet by returning Dai and paying the stability fee. the Vault remains empty once all Dai is completely returned and all collateral is retrieved.
The working of MakerDAO can be described in brief as below:
- The user opens a collateralized debt position (CDP)
- If the value of Ethereum goes down, the user pays a fee and gets closed out
- If the value of Ethereum goes up, the user draws DAI from the CDP
- With the newly created DAI, the user buys more Ethereum
- The user adds more Ethereum to their CDP to protect against a drop in Ethereum value.
- The cycle repeats
Native Assets
The native assets of the Maker DAO protocol can be described as below:
1) DAI is an ERC20 token that has a steady value relative to one US dollar. It is built on the Ethereum blockchain. It plays a very important role in the MakerDAO lending system., DAI is created when a loan is taken out on MakerDAO. It is the currency used by the users to borrow and then payback
2) The MKR token was created by MakerDAO. Its primary purpose is to support the stability of MakerDAO’s DAI token. It also aims to enable governance for the Dai Credit System. Some of the key decisions on the operation and future of the system are being made by the holders of MKR.
Maker Coin Use Cases
There are four broad markets that Maker covers which benefit from the use of Dai. These can be listed as below:
1) Gambling Markets: Long-term bets are not efficient to make with volatile cryptocurrencies. The underlying asset price risk and the bet’s risk are exposed to the use of the Volatile cryptocurrencies. But with the help of a stable cryptocurrency like Dai, there are very low risks associated as it depends on the gambling bet.
2) Financial Markets: In the financial sector, Price stable collateral such as Dai is in need of derivative smart contracts. It also offers permissionless decentralized trading leverage due to the Maker’s collateralized debt.
3) International Trade: The international transaction costs could be costly; Dai eliminates intermediaries from the transaction process. At the same time, it also allows foreign exchange volatility to be efficiently mitigated.
4) Transparent Accounting Systems: Dai undertakes completely verifiable transactions, This allows different corporations, governments, and organizations to increase their efficiency and to lower their chance of corruption.
How are MKR tokens produced?
Depending on the closeness of the DAI stable coin to the US dollar, The MKR token is being created or burned. Thus the stability of DAI is an important factor that decides the creation of new MKR. More MKR is burned if the DAI remains stable, which decreases the total supply. Whereas the more of the MKR is created if DAI varies or fluctuates too much from the US dollar which further leads to an increase in the total supply.
Both Maker and Dai are standard Ethereum Tokens which are built on the ERC-20 standard. Hence, Maker and Dai must be stored in an ERC-20 compliant wallet such as MyEtherWallet. Offering better security than software wallets, hardware wallets such as the Ledger Nano S and Trezor are generally the safest way to store ERC-20 standard tokens.
How do you get hold of MKR tokens?
The multi-currency wallets can be used in managing the Maker DAO tokens. These tokens are also available on some of the major exchanges as well as the decentralized exchanges like the Kyber network. This can be described as below:
Step 1: Download the wallet.
Step 2: Next, create a password and store the 12-word automatically generated backup phrase in a safe location.
Step 3: Next, send the Maker tokens to your wallet for safe storage.
Step 4: You can buy more MakerDAO tokens, or exchange them for other cryptos in the wallet.
How Safe is MakerDAO?
The MakerDao system has been operating efficiently since 2017. The smart contracts used on the platform have been audited and tested more than any other open finance-based protocol. With this historical security into account, obtaining a loan via MakerDAO is comparatively safe and secure.
As the Ethereum smart contracts govern the MakerDao, All loans are purely crypto-to-crypto, and as a result, there is currently no insurance on user balances. In addition, Maker is completely transparent regarding the development of its blockchain project.
A Maker is a smart contract built on the Ethereum platform. Through the systems such as autonomous feedback mechanisms and Collateralized Debt Positions (CDPs), it backs and stabilizes the value of Dai.
The Future
The team at MKR with DAI hopes to overcome the extremely volatile prices of cryptocurrency in the coming times. In the whitepaper, the team provides different examples like Bitcoin falling 25 percent in one day or rising more than 300 percent in just one month.
The team at Maker DAO are of the opinion that the stable digital assets are necessary to let blockchain technology reach its full potential. As a result of this, it introduced Dai, which is further backed by collateral.
There are also a wide number of strategies in play to keep the value of Dai stable. The white paper displays sorted solutions to the potential problems the system may encounter. It also further provides the steps to mitigate the risk.
Conclusion
The Maker Protocol allows its users to generate Dai, It is a stable store of value that lives entirely on the blockchain. Dai is a decentralized stable coin which means that is neither issued nor administered by any centralized entity nor any trusted intermediary or counterparty. It is unbiased and borderless which means that it is available to anyone and anywhere.
With hundreds of partnerships and one of the strongest and efficient developer communities in the cryptocurrency space, MakerDAO has become the pioneer of the decentralized finance (DeFi) movement. Maker is further unlocking the power of the blockchain to deliver on the promise of economic empowerment today.
