With a total value locked (TVL) of $6.2 billion, MakerDAO (MKR) is the 3rd largest DeFi platform. Founded in 2015, and launched on Ethereum in 2017, MakerDAO is probably the oldest among the current leading DeFi players. MakerDAO was one of the key platforms that introduced the concept of collaterised crypto borrowing – a niche that plays an important role in the DeFi ecosystem. In this article, we take a detailed look at this truly iconic DeFi platform.
Understanding Collateralised Borrowing
At the core of MakerDAO's functionality lies its collateralised borrowing system. Users can lock up their crypto assets as collateral and borrow DAI, the native stablecoin of the MakerDAO platform. The collateral ensures the stability of the borrowed DAI, as its value is supported by the locked assets. Some popular cryptos accepted as collateral on Maker include Ether (ETH) and Wrapped Bitcoin (WBTC). By utilising the crypto collateral, users can secure their loans and access liquidity without intermediaries.
The borrowing process involves users creating a Collateralised Debt Position (CDP) by locking their crypto assets. The locked collateral must exceed a specified collateralisation ratio to mitigate the risk of price volatility.
Understanding the DAI Stablecoin
DAI is an essential component of the MakerDAO ecosystem. It is a decentralised stablecoin pegged to the value of the US dollar (USD). DAI provides users with stability and a reliable store of value within the volatile crypto market. Unlike traditional stablecoins, DAI is not backed by fiat currency in a bank account. Instead, it derives its stability from the overcollateralised crypto assets locked within the MakerDAO platform.
While stablecoins like USDT, USDC, or BUSD rely on private companies that guarantee the peg, DAI is a truly decentralised stablecoin, whose peg to the USD is maintained algorithmically via the borrowing activity on the MakerDAO protocol. This, in theory, should ensure the stability and transparency of the stablecoin. Users can utilise DAI for various purposes, including trading on decentralised exchanges, making payments, and hedging against market volatility.
Understanding MKR Token and Governance
In addition to being one of the earliest crypto borrowing platforms, MakerDAO is also a pioneer of the decentralised governance concept in the industry. In addition to the DAI stablecoin involved in the actual borrowing process, the protocol uses a governance token, MKR. MKR holders play a crucial role in governing the system and managing its risk parameters. Unlike DAI, which represents a stable value, MKR has a variable value that reflects the success and demand for the MakerDAO ecosystem.
MKR token holders have voting rights and actively participate in decision-making regarding the platform's critical parameters. This includes setting stability fees, which represent interest rates on borrowed DAI, as well as determining which cryptocurrencies are acceptable as collateral. MKR holders are responsible for ensuring the stability and security of the MakerDAO platform.
In addition to its governance function, MKR also act as a financial stability guarantor for the MakerDAO system. In the event of a significant platform-wide loss (e.g., if the total value of collaterals held declines sharply), MKR tokens are automatically minted and sold on the wider crypto market to cover the debt, thereby protecting the stability of the platform. This mechanism incentivises MKR token holders to actively participate in risk management and maintain the integrity of the MakerDAO ecosystem. Any MKR token holder knows that an irresponsible or slack attitude toward governing the platform may result in the need to mint additional MKR tokens, thereby reducing the token’s value due to supply inflation.
MakerDAO’s Pioneer Status in DeFi
The MakerDAO platform has had a significant impact on the DeFi landscape. By providing a decentralised borrowing and stablecoin solution, MakerDAO has enabled individuals and businesses to access liquidity without relying on traditional intermediaries - the banking system.
The collateralised borrowing mechanism ensures the stability of DAI, creating a reliable alternative to traditional fiat-pegged stablecoins. DAI remains the world’s highest-capped algorithmically maintained stablecoin.
The governance model of MakerDAO, driven by MKR token holders, allows for a decentralised and community-driven decision-making process. MakerDAO was an early adopter of the user-driven governance concept in the crypto industry.
The concepts pioneered by MakerDAO are now being used by many other DeFi apps. In general, MakerDAO has had a massive impact on the crypto borrowing niche of the DeFi industry. If borrowing funds outside of the traditional banking system is on your radar, MakerDAO is probably the first, or at least one of the first, places to check out.
Understanding Collateralised Borrowing
At the core of MakerDAO's functionality lies its collateralised borrowing system. Users can lock up their crypto assets as collateral and borrow DAI, the native stablecoin of the MakerDAO platform. The collateral ensures the stability of the borrowed DAI, as its value is supported by the locked assets. Some popular cryptos accepted as collateral on Maker include Ether (ETH) and Wrapped Bitcoin (WBTC). By utilising the crypto collateral, users can secure their loans and access liquidity without intermediaries.
The borrowing process involves users creating a Collateralised Debt Position (CDP) by locking their crypto assets. The locked collateral must exceed a specified collateralisation ratio to mitigate the risk of price volatility.
Understanding the DAI Stablecoin
DAI is an essential component of the MakerDAO ecosystem. It is a decentralised stablecoin pegged to the value of the US dollar (USD). DAI provides users with stability and a reliable store of value within the volatile crypto market. Unlike traditional stablecoins, DAI is not backed by fiat currency in a bank account. Instead, it derives its stability from the overcollateralised crypto assets locked within the MakerDAO platform.
While stablecoins like USDT, USDC, or BUSD rely on private companies that guarantee the peg, DAI is a truly decentralised stablecoin, whose peg to the USD is maintained algorithmically via the borrowing activity on the MakerDAO protocol. This, in theory, should ensure the stability and transparency of the stablecoin. Users can utilise DAI for various purposes, including trading on decentralised exchanges, making payments, and hedging against market volatility.
Understanding MKR Token and Governance
In addition to being one of the earliest crypto borrowing platforms, MakerDAO is also a pioneer of the decentralised governance concept in the industry. In addition to the DAI stablecoin involved in the actual borrowing process, the protocol uses a governance token, MKR. MKR holders play a crucial role in governing the system and managing its risk parameters. Unlike DAI, which represents a stable value, MKR has a variable value that reflects the success and demand for the MakerDAO ecosystem.
MKR token holders have voting rights and actively participate in decision-making regarding the platform's critical parameters. This includes setting stability fees, which represent interest rates on borrowed DAI, as well as determining which cryptocurrencies are acceptable as collateral. MKR holders are responsible for ensuring the stability and security of the MakerDAO platform.
In addition to its governance function, MKR also act as a financial stability guarantor for the MakerDAO system. In the event of a significant platform-wide loss (e.g., if the total value of collaterals held declines sharply), MKR tokens are automatically minted and sold on the wider crypto market to cover the debt, thereby protecting the stability of the platform. This mechanism incentivises MKR token holders to actively participate in risk management and maintain the integrity of the MakerDAO ecosystem. Any MKR token holder knows that an irresponsible or slack attitude toward governing the platform may result in the need to mint additional MKR tokens, thereby reducing the token’s value due to supply inflation.
MakerDAO’s Pioneer Status in DeFi
The MakerDAO platform has had a significant impact on the DeFi landscape. By providing a decentralised borrowing and stablecoin solution, MakerDAO has enabled individuals and businesses to access liquidity without relying on traditional intermediaries - the banking system.
The collateralised borrowing mechanism ensures the stability of DAI, creating a reliable alternative to traditional fiat-pegged stablecoins. DAI remains the world’s highest-capped algorithmically maintained stablecoin.
The governance model of MakerDAO, driven by MKR token holders, allows for a decentralised and community-driven decision-making process. MakerDAO was an early adopter of the user-driven governance concept in the crypto industry.
The concepts pioneered by MakerDAO are now being used by many other DeFi apps. In general, MakerDAO has had a massive impact on the crypto borrowing niche of the DeFi industry. If borrowing funds outside of the traditional banking system is on your radar, MakerDAO is probably the first, or at least one of the first, places to check out.