MakerDAO is one of the first and most well-known projects focusing on decentralised finance. As a decentralised lending platform, Maker (as it is commonly referred to) makes it possible to borrow and lend in a much different way than in traditional finance. Its stated goal is to facilitate “financial freedom without volatility.”
To achieve that goal, MakerDAO uses the Maker Protocol which enables users to borrow against collateral. Unlike traditional loans, however, which take fiat currencies as collateral, Maker allows users to borrow against a variety of supported crypto assets as collateral that they deposit into smart contracts. MakerDAO is built on the Ethereum blockchain and the crypto loans that it facilitates are handled through Ethereum smart contracts.
The MakerDAO project was started in 2015 by Danish developer, and current CEO, Rune Christiansen, who built the Maker Protocol on the Ethereum blockchain under the banner of his Maker Foundation. Christiansen’s vision was to create a decentralized financial system that would be governed by its user community and, in doing so, give borrowers more control of their assets – even in traditionally adverse economic environments such as territories dealing with high levels of inflation. Over time, the Maker Foundation has actively ceded control of the Maker Protocol, in order to transfer its ownership completely and become a decentralised autonomous organisation (DAO). The DAO is composed of individuals all over the world who hold MakerDAO’s governance token MKR, which in turn confers the right to vote on changes to the network.
Two tokens stand at the heart of MakerDAO. The Dai token is a stablecoin which aims to be pegged to the US dollar through supply and demand. When users seek to borrow through the MakerDAO platform, they deposit supported cryptocurrencies as collateral and receive their loans in Dai. Meanwhile, the MKR token is providing backstop liquidity in case the system accumulates bad debt, and holders of MKR also take on a role in the governance of the Maker Protocol.
In more detail, the Maker Protocol’s loan functionality is based on smart contracts on the Ethereum network, technically referred to as collateralized debt positions (CDP), or more recently Maker Vaults.
When a user wants to borrow Dai, they deposit ETH or other collateral asset into the Maker Protocol to be held in a Maker Vault and receive a loan in newly minted Dai relative to their collateral. The loaned Dai can be paid back at any time in return for the collateral or alternatively, if the value of ETH drops, the Vault can liquidate the collateral to ensure the loan is secured. Meanwhile, when they are paid back, Dai tokens are automatically destroyed.
By contrast, the MKR token serves two purposes on the MakerDAO network. The governance rights conferred by MKR tokens allow holders to regulate the ecosystem: the addition of new collateral types and risk parameters for them, for example, are set by a majority vote of MKR holders. In addition to governance, MKR holders also act as buyers of last resort for Dai loans: if the collateral ETH held in the Maker Vaults is insufficient to cover the amount of Dai in circulation, MKR is created and sold in a debt auction in order to raise the amount of collateral. The functionality of MKR is designed to incentivize holders to act responsibly in their collective governance of the network.
The Maker Protocol is intended to unlock the possibilities of decentralized finance and provide developers and users with a set of innovative financial tools. Accordingly, the Maker Protocol and its Dai stablecoin crucial base layer infrastructure for various other DeFi protocols.
Most prominently, Dai is used, held, and accepted by a range of community-developed DeFi apps that use the Ethereum blockchain. The Airbus Heritage platform, for example, is a blockchain-enabled fundraising and donation platform that allows charities to onboard cryptocurrency and smart contracts and so open up funding possibilities to a new class of potential donors. Unicef is also using the Dai token to allow donors to fund open-source explorations of blockchain for social projects: Dai donations to Unicef in any amount go towards bounties and research funds for a range of tech projects designed to help vulnerable people.
Other DeFi apps that currently operate in the Maker Ecosystem and utilize Dai, include, Outlet, a high-yield alternative to savings accounts, and Uniswap, a protocol which facilitates fast, efficient crypto trades on the Ethereum blockchain. In addition to applications in commercial finance, MakerDAO hopes that the adoption of Dai positively impacts regions suffering from hyperinflation by offering users a stable alternative to volatile fiat currencies.
Dai is making its way into the gaming industry as developers use the blockchain to monetize and cultivate in-game economies. Games like Axie Infinity, Skyweaver, and Battle Racers allow users to create and tokenize in-game assets, and earn rewards for those tokens on the blockchain. To promote Dai within the gaming ecosystem, MakerDAO has launched the Dai Gaming Initiative to incentivize the development of gaming apps that integrate Dai rewards.
MakerDAO is also seeking to integrate Dai within the art industry, encouraging artists to use Dai and the blockchain to trade artwork, prove ownership, and even digitize their work as unique digital tokens (or non-fungible tokens).
As a decentralized autonomous organization, MakerDAO’s long-term objective is to transfer its governance entirely to its users, who will run the blockchain as a community. Those agreements are reached via a voting system that issues polls to MKR holders such as which cryptocurrencies to accept as collateral, where to set borrowing rates, and which individuals to appoint as Maker Representatives.
In the latest governance polls, for example, users voted on whether to add the Gemini Dollar (GUSD) and Pax Gold (PAXG) to the list of accepted collateral currencies in the Maker Protocol. Both polls resulted in support for adding the cryptocurrencies.
Developers continue to use Dai and the Maker Protocol to create innovative DeFi apps that grow the Maker Ecosystem and increase its accessibility to users around the world. To support that effort, MakerDAO hosts a repository of resources for developers seeking to integrate Dai, while the community itself has developed the Awesome MakerDAO resource which also serves to introduce new users to the possibilities of DeFi.
- What is MakerDAO?