What is MakerDAO? A 3-minute guide to the lending platform
- MakerDAO is a decentralized organization built on Ethereum to enable the lending and borrowing of cryptocurrencies without the need for an intermediary
- MakerDAO is comprised of a smart contract service that manages borrowing and lending, as well as two currencies: DAI and MKR to regulate the value of loans.
- MakerDAO is part of the “DeFi” movement – a catch-all term for financial tools and services that don’t rely on centralized parties to coordinate and control access.
Using crypto to borrow crypto was once very tricky. Since most crypto assets fluctuate so wildly, the amount someone borrowed in crypto and the amount someone had to repay could be very different over a short period of time. This is where MakerDAO comes in. By combining loans with a stable currency, MakerDAO wants to allow anyone to borrow money and reliably predict how much they will have to pay back.
What is MakerDAO?
MakerDAO is an organization that develops lending, savings, and stable cryptocurrency technology on the Ethereum blockchain. He created a protocol allowing anyone with ETH and a MetaMasque wallet to lend money in the form of a stable currency called DAI. By locking certain ETHs in MakerDAO smart contracts, users can create a number of DAI-the more the ETH is locked, the more the DAI can be created. When users are ready to unlock their ETH, which serves as collateral for their DAI loan, they simply pay off the loan along with any fees.
MakerDAO has created a central layer of the decentralized financial system on Ethereum– what kids nowadays call “DeFi”.
Who invented MakerDAO?
Rune Christensen is the founder and current CEO of MakerDAO.
Did you know?
In September 2018, world-renowned venture capital firm Andreessen Horowitz invested $ 15 million in MakerDAO to purchase 6 percent of the total Maker Token Supply (MKR). This was the first investment by the company’s $ 300 million a16z crypto fund.
What’s so special about him?
Without credit checks and without people being honest, how does borrowing even work on the blockchain? The answer is liquidation, which is when an asset is converted into capital in order to pay off creditors.
When the collateral for a loan falls below a certain point, which means that the price of ETH has fallen too far below the amount of DAI borrowed, the loan is liquidated. In other words, the ETH used as collateral is sold to repay the borrowed DAI plus penalties and fees. Liquidation and the threat of liquidation keep the system stable by preventing people from borrowing too much.
Did you know?
MakerDAO is the most widely used and one of the oldest project in Ethereum’s Decentralized Finance (DeFi) ecosystem. To date, they have approximately 2.3M ETH locked in their protocol, which represents more than 2% of the total ETH supply.
What else is different?
If the threat of liquidation keeps the system honest, then Manufacturer (MKR) token holders are the lenders of last resort. When the price of ETH collapses and too many loans are liquidated at the same time, MKR is created and sold in order to pay off the loans. At the same time, the fees must be paid in MKR and liquidation penalties are used to redeem the MKRs, which are burnt or destroyed. In theory, MKR should always have sufficient value to back up liquidated loans.
DAI, ETH, and MKR operate as an automatic system of checks and balances – each working to counteract the other and keep the system stable and decentralized.
Here’s a quick summary of how all three work:
- DAI is a ERC20 token on the Ethereum blockchain that has a stable value of one US dollar. This is also the key to the MakerDAO loan system. When a loan is taken out on MakerDAO, the DAI is created. It is the currency that users borrow and repay.
- The Maker Token (MKR) was created by MakerDAO and its primary purpose is to support the stability of MakerDAO DAI token and enable governance of the Dai credit system. MKR holders make key decisions about the operation and future of the system.
If you wanted to know more about how MKR works, we have a guide for it. If you want to understand how DAI works, we have exactly what it takes for that too.
How are MKR tokens produced?
MKR is a ERC20 token which is created or burned based on how close the DAI stablecoin is to the US dollar. The creation of new MKRs depends on the stability of DAI. If the DAI remains stable, more MKR is burned, which decreases the total supply. If the DAI fluctuates too far from the dollar peg, more MKRs are created, thus increasing the total supply.
How do I get MKR tokens?
MKR is available on major exchanges like OKEx and decentralized exchanges like the Kyber Network.
What can you do with MKR?
Since MKR holders benefit financially from a stable MakerDAO system, they are urged to act in the best interests of the MakerDAO protocol. As a result, MKR holders can vote on governance decisions such as the amount of fees set and the types of collateral that can be accepted as collateral by the protocol. In the MakerDAO system, one MKR token equals one vote, so people or organizations with large MKR holdings can have a big influence on the outcome of the vote.
MakerDAO has become one of the flagship projects of the DeFi movement through a series of high-level partnerships that have helped drive adoption.
However, this has not been a bed of roses for MakerDAO. It is, like many other projects in this field, exposed to the effects of huge global events, such as the Coronavirus. Which means the system can become unstable, and as we have reported before, almost unusable.
But like a large part of this ecosystem, it is still in its infancy, and the challenges that MakerDAO, if it can overcome, will only make it stronger.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment or other advice.