MakerDAO has been around for quite a while now and is currently holding the place of highest TVL project on Ethereum. What are the services they offer and how do the work together?🧐
What is MakerDAO?
MakerDAO is an Ethereum-based smart contract platform that allows you to issue $DAI stablecoin against cryptocurrencies and real assets. The name of the platform comes from AMM or market maker applications. Project’s development is fully supervised by a DAO and uses the $MKR governance coin.
Doesn’t seem like anything too special, but the amount of safety focused technology you get with $DAI speaks for itself. 🗣️
How does $DAI stay stable?
The key difference from other stablecoins is $DAI being completely based on Ethereum. $DAI stablecoins are issued by protocol users themselves. A certain amount of cryptocurrency locked in a special smart contract called Vault as collateral is required for that. 🔒
Due to cryptocurrency prices being highly volatile, MakerDAO uses the principle of overcollateralization, making the amount of collateral greater than the amount of issued $DAI stablecoins.
Since November 2019 MakerDAO accepts collateral in other coins except Ethereum like $USDC, $WBTC, $MANA, $USDP, $LINK, $YFI, $GUSD, $renBTC and $MATIC. 🪙
What happens if $DAI depreciates?
System viability is supported by Vault liquidations when the value of collateral for debt positions falls below the Liquidation Ratio. 📉
Liquidation ratio is the collateral minimum required for each type of asset stored in the Vault. The rate of collateral, obviously differs depending on the cryptocurrency used in collateral. In case the ratio can not be reached, the user’s Vault is considered unsecured and subject to liquidation. 🙁
Liquidation means selling the collateral for an equivalent amount of $DAI. The so-called liquidators, holding $DAI, auction their $DAI for the collateral, keeping enough $DAI in the Vault at all time. Users can affect the liquidation price by increasing collateral or returning $DAI into the Vault. 🔄
The whole process is basically users selling and buying $DAI form the DAO themselves, which sounds a bit control abusing, but the system works remarkably well. 🤟
To ensure even higher stability, MakerDAO has a special Stability Fee that is continuously charged to all $DAI holders, using Vaults. Major part of the funds raised is used to support the Maker Protocol operation, including covering the costs of running the DSR, Risk Teams, and other mechanisms. ⚙️
What is DSR?
Most stablecoins allow the users to make profit from them and $DAI is now exception. DAI Savings Rate or DSR is a certain profit rate, given to a user for locking their $DAI tokens inside the DSR smart contract.
Vault users receive rewards automatically while maintaining control over tokens. The DSR smart contract doesn’t require withdrawing and depositing funds and has no liquidity restrictions. The rate is set and adjusted by holders of MKR tokens through the on-chain management system. 👨💼
DSR is a global parameter that can increase or decrease, affecting the demand for DAI. DSR increasing will motivate users to hold more DAI, while a decrease leads to a complementary drop in demand. 📈
Conclusion
MakerDAO is a great example of how advanced and thoughtful technology can create a useful and demanded product, specifically an asset. This is the exact reason why most projects fail nowadays - they simply require a bit more dedication and effort to become a thing. $DAI is holding the fifth place in terms of popularity as a stablecoin and will probably be competing with $USDT at some point because DAOs are a part of the current trend.
Stay tuned 📻
