The Maker DAO Deep Dive I Notum
May 22, 202310 min read
Cryptocurrency is a virtual asset that is getting more and more attention year after year. With the growing interest in crypto, there are more coins, tokens, and projects that ensure its vital activity. However, for many people, digital assets continue to be intimidating and uncharted territory. Even investors advocating new technologies were wary of the crypto market at first, but the emergence of stablecoins greatly accelerated the popularization and trust in the crypto. This decentralized asset class is backed by the value of fiat currencies such as the dollar and the euro, so it is less risky.
It was stablecoins that laid the foundation for the wider use of cryptocurrencies, including in lending. Since most coins are volatile and can go up or down in value, borrowing was too risky. However, now there are convenient services and applications that allow you to comfortably use various crypto assets in the field of lending. MakerDAO is a portal that combines loans and fiat currency so users can know in advance the amount of debt they have to pay. Today's overview will give you a broader idea of what the Maker DAO is, how it works, and what its features and capabilities are.
What Is Maker DAO?
DeFi is a relatively new alternative to the traditional open-source financial system that seeks to replace centralized financial institutions. DeFi runs on Smart Contracts, which makes the financial system faster and more secure and eliminates the need for intermediaries. The first DeFi application to gain popularity and recognition was the Maker DAO platform. It was launched on the main Ethereum network on December 18, 2017. The original goal of the platform was to develop solutions that will help to borrow, lend, and save crypto.
In simple words, Maker DAO can be described as an innovative solution that offers people the opportunity to take out decentralized loans. Moreover, the platform enables people to securely borrow at pre-set interest rates, which will provide transparency to the economy. Among other things, an important part of MakerDAO is its community, namely developers, organizations, supporters, and other people who participate in supporting the platform. MakerDAO is the platform that has greatly advanced the use of DeFi and the use of blockchain.
Maker DAO Brief History
The idea of creating the MakerDAO platform and DAI stablecoin appeared back in 2015. Rune Christensen, the future founder of Maker DAO, developed an interest in biochemistry and international trade and later became one of the co-founders of Try China, an international recruiting company. Already in 2014, he understood the potential of DeFi, so he founded the Maker Foundation. At the moment, the company is based in Santa Cruz, California.
2015 was a pivotal year in the history of DeFi as Christensen worked with Andy Millenius and other developers to build a decentralized platform that was safe to borrow with stablecoins. In March of the same year, Christensen told the world about the concept of eDollar, a stablecoin on the Ethereum blockchain, after which he proposed rewarding holders with MKR tokens for providing liquidity.
The first version of MakerDAO, as well as the DAI token, was launched in December 2017. It is important to note that at the time of creation, the only asset used as collateral was Ethereum, however, in 2019 there were some changes in Maker DAO technology. Now, the DAI system has become multilateral, and different cryptocurrencies, including USDC and BAT, can be used to secure the loan.
What Is DAI Stablecoin?
MakerDAO has its own DAI cryptocurrency, which has a market capitalization of $4,879,361,121 as of May 2023. DAI is one of the popular stablecoins that is pegged to the US dollar, which reduces its volatility and makes it safer to use. The main reason for the lack of mass adoption of crypto lies precisely in its instability since no one wants their money to lose value, which led to the creation of stablecoins such as DAI. MakerDAO aims to solve the problem of volatility and make the crypto economy stable. It is also important to note that this token has an unlimited supply as users provide collateral to issue more DAI.
Thus, the MakerDAO platform allows you to generate DAI, and any investor or user who uses the ETH blockchain can borrow money in the form of this coin. Beyond that, MakerDAO is a unique platform in that no single central authority controls DAI. "Dai mitigates volatility through an autonomous system of smart contracts called the Maker Protocol, as well as through decentralized community governance." - Coinlist. DAI as a stablecoin offers lower fees, instant transfers, and secure transactions. Now, DAI is ranked 17th by the capitalization of all existing cryptocurrencies on the market.
What Is Maker Token (MKR)?
MKR is the token that ensures the stability of the MakerDAO protocol. The essence of the work is quite simple: MKR is burned as a “fuel” for smart contracts of the platform, which can be compared with gas in Ethereum. In addition, MKR has other interesting features, for example, its holders can participate in voting for changing protocol parameters and receive rewards depending on the results. Thus, users vote to change the main protocol, make their own proposals, and influence the development of the company.
MKR holders can currently vote on four parameters: maximum user debt, stabilization fees, fines, and collateral liquidation ratio. Since the project is decentralized, MakerDAO is run by people from all over the world who own the MKR token.
How Does Maker DAO Work? Maker Dao Vaults
DAI generation occurs in the Maker protocol using any acceptable assets. This procedure is carried out thanks to Smart contracts called Maker Vaults. In simple terms, DAI is created from the collateral value contributed by the user. Transactions are decentralized and secure because Maker DAO uses the Ethereum blockchain network. In addition, after placing a pledge by the user, access to the vault is opened, which also protects all transactions from unauthorized access. Thus, the user can also withdraw DAI against the security he has deposited. "When the borrowed amount taken from the vault is returned, the DAI amount associated with the vault is destroyed and detached from the supply." - BlockchainCouncil.
The ability to create and destroy DAI makes the token flexible, which helps keep its value close to the US dollar. However, users should note that the vault position should be overcollaterized by a minimum of 150% so to provide liquidation risk. In other words, if the value of the collateral is lower than the borrowed amount, the deposited collateral is liquidated to recover the amount. This is necessary to ensure the solvency of DAI for users.
How to Use MakerDAO?
To start using MakerDAO, you can go to the Maker Oasis app. It is as easy to use as possible, as the app has a “Learn” tab that will help you deep dive into its functions and glossary. There you can also check out the key concepts and tutorials to help you get started quickly. In addition, Oasis has a Support that you can contact and a FAQ section for reference.
The app is designed for both DAI tokens and making a Maker Vault. However, please note that to use the application, you need to have a wallet and link it to Oasis. After that, you will be able to explore the list of different tokens that you can use as collateral. Since DAI is a fairly popular coin and is supported by most crypto projects, you can use it almost as wide as fiat money with a MakerDAO vault.
Maker DAO is the first DeFi application that has not lost its importance in the cryptocurrency world so far. Maker DAO not only expands the scope of crypto but also allows users to lend and borrow money without the need for centralized systems. MKR token holders are eligible to take part in the future of the platform, and burning MKR after loans are repaid leads to an increase in its scarcity and rise in price. The transparency of Maker DAO and the stability of its native tokens make the platform attractive to many investors and borrowers who are wary of cryptocurrency volatility.
The native token of the DAI platform has the same properties as other fiat-pegged stablecoins, so the scope of its use is quite wide. Since DAI takes advantage of the blockchain, you can not only pay for goods and services but also transfer money around the world without providing any banking information. Proper storage of the token will also ensure its security. Of course, the platform is not without risks, such as a possible high rise of non-repayments, where the price of the MKR token could fall. Thus, be sure to do your own research and invest wisely.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.