What is MakerDAO?
The Long Definition
MakerDAO is a DAO on the Ethereum blockchain. It’s responsible for governing a decentralized lending protocol called Maker. Maker allows users to borrow the stablecoin DAI by offering ether (ETH) or any other supported ERC-20 token as collateral.
Members of the DAO hold the Maker token (MKR).
History of MakerDAO
MakerDAO was founded in 2015 by Rune Christensen, a Danish entrepreneur. This was part of his bigger idea of a decentralized protocol that can create and issue a stablecoin pegged to the dollar. MakerDAO would be the community that governs this protocol.
As part of the project, the Maker token (MKR) was launched shortly after. It would form the basis of governance of the lending protocol. Finally, the DAO was officially launched in December 2017. The stablecoin, DAI, and its smart contracts were also deployed on the main Ethereum network.
Today, all of the project’s development and management is done by the Maker Foundation. This happens in accordance with members’ wishes as expressed through votes in MakerDAO.
How Does MakerDAO Work?
MakerDAO is part of a larger project that consists of the Maker protocol, Dai (DAI), and MKR. Let’s break them down.
Maker is a lending platform on Ethereum. It allows users to take out overcollateralized stablecoin loans that are backed by other cryptocurrencies.
Collateralized means that the borrower has to give up some valuable asset(s) as security. In this case, borrowers lock up ETH, Wrapped Bitcoin (BTC), or other supported crypto assets in Maker’s smart contracts. They’ll then regain access to these assets once they repay their loan.
Since the loans are overcollateralized, the value of the collateral is typically more than that of the loan received. This amount is determined by the collateralization ratio. For Maker, the ratio hovers at around 150%. So, for every $100 you borrow, you must provide at least $150 in collateral.
DAI is the stablecoin that Maker’s loans are issued in. So, when you borrow funds on Maker, you’ll receive them as DAI.
DAI is a crypto token that’s backed by other crypto assets. How? Think 100 years ago when the dollar was backed by gold. For every dollar in circulation, there was an equal value of gold in the Federal Reserve.
It’s a similar situation with DAI, but this time, with other crypto coins and tokens instead of gold. For every DAI token in circulation, there are other valuable crypto assets, like ETH, in Maker’s reserves.
These reserves come from the collateral you provide when you take out a loan. Remember that the loans are overcollateralized. So, the reserves are worth more than the DAI in circulation. This is because of the volatile nature of cryptocurrencies. So, having reserves worth more allows DAI to maintain its value even when the market is in turmoil.
And speaking of value, being a stablecoin, DAI’s value is pegged to the dollar. This means that theoretically, 1 DAI will always be worth 1 dollar. However, fluctuations do occur every once in a while, causing the DAI to be worth more or less than $1.
And this is where MakerDAO comes in.
The success of the Maker protocol relies on the DAI remaining stable at $1. This means a whole lot of monetary policies to get things right and backup procedures to fall back on in case things go wrong.
MakerDAO is the organization responsible for that. This is why it is often compared to a central bank. In the same way that a central bank makes policies for a country’s currency, MakerDAO does so for DAI.
But unlike a central bank, decisions are not made behind closed doors by a few executives. MakerDAO is a decentralized autonomous organization. This means that it is collectively owned and controlled by its members. And anyone, anywhere in the world can become a member by buying MKR tokens.
In this case, MKR acts as a governance token. It gives holders the right to participate in the management of the project. Therefore, MKR holders actively take part in the formulation and implementation of Maker’s policies and procedures through MakerDAO. This happens through proposals and votes.
Changes are then implemented by developers in the Maker Foundation.
What Makes MakerDAO Special?
MakerDAO is proof that it’s possible to have a decentralized stablecoin. DAI is the only largely successful stablecoin that’s not managed by a centralized company. However, it hasn’t been able to completely escape the clutches of centralization.
Maker accepts USDC and TUSD as collateral. These are centralized. So, DAI is backed, in part, by centralized assets. This might present an issue if USDC and TUSD ever collapse.
How Can I Join MakerDAO?
You can join MakerDAO by buying the MKR token. By investing in the coin, it’s assumed that you have every reason to act in the best interest of the protocol. Therefore, you’ll be granted the right to vote on governance decisions.
MKR is available to buy on major crypto exchanges like Binance. You can also get it at decentralized exchanges like Uniswap. It’s an ERC-20 token, compatible with Metamask and Trustwallet.