MakerDAO, is the lending protocol behind the DAI stablecoin. It is considered one of the most successful decentralised lending protocols. It is also an exceptional example of a Decentralised Autonomous Organisation (DAO) that allows token holders to have a voice in the company's decisions.
Maker is the oldest decentralized credit protocol with total deposited assets of over $7 billion which launched in 2017. As a DeFi pioneer, the protocol manages decisions about stability, transparency, and collateralization via its DAO structure. Maker (MKR) token holders are allowed to vote on proposals, which are implemented on the blockchain in the next step. MakerDAO advances DeFi technology for borrowing, saving, and establishing its own stablecoin DAI within the Ethereum blockchain.
What is MakerDAO?
The founder and CEO of the MakerDAO platform is Rune Christensen. He's been actively involved in the cryptocurrency and blockchain space, contributing to the development and promotion of decentralised financial solutions. Since its inception, the platform has achieved notable milestones, including securing a $15 million investment from venture capital firm Andreessen Horowitz in 2018. This financial backing has played a crucial role in the platform's development and growth.
The key challenge is how to facilitate borrowing without traditional credit checks in a trustless environment. The solution lies in the concept of liquidity, where assets can be easily converted into capital. In addition, MKR token holders have the opportunity to participate in the governance of the MakerDAO protocol. This will influence decisions, parameters and enhancements to the MakerDAO protocol.
Participation in MakerDAO involves active risk management, requiring users to remain vigilant to market conditions and make necessary adjustments. By providing a decentralised platform, MakerDAO enables users to participate in collateralised lending, stablecoin creation and protocol governance, contributing to the dynamic and evolving field of decentralised finance. Users are encouraged to stay informed about the associated risks and developments in the DeFi space.
DAI Stablecoin and DeFi
Stablecoins are a type of cryptocurrency that are pegged to a non-volatile asset, often the US dollar, or in some cases pools of multiple assets to mitigate risk. Stablecoins address the issue of volatility risk inherent in the crypto space. While the space is led by centrally-backed providers such as Tethers USDT and Circles USDC, there are also decentralised alternatives such as MakerDAO's DAI. The DAI stablecoin is unique in that it is backed by more collateral than required for a 1:1 ratio. DAI is over-collateralised to account for the high volatility in the crypto space and a stability fee is applied. If the value of the collateral falls below the liquidation ratio, the crypto assets will be liquidated to mitigate potential losses. Users are responsible for managing their collateral to prevent it from falling below the liquidation ratio.
MakerDAO's crypto protocol introduced liquidity as a key factor in crypto lending and borrowing. For example, if the collateral for a loan (such as ETH) experiences a significant drop in value below the DAI loan amount, the loan will be liquidated. In this scenario, the platform sells the ETH collateral to pay off the DAI loan, including associated fees and penalties. The interplay of liquidity and the prospect of liquidation serves as a mechanism to ensure stability in the lending and borrowing process on the blockchain.
MakerDAO offers a range of functionalities within the decentralised finance (DeFi) space on the Ethereum blockchain. Users can use their Ethereum (ETH) holdings as collateral by engaging with MakerDAO's smart contracts. This generates DAI. The amount of DAI generated is correlated to the value of the locked ETH. The borrowed DAI can then be used for various DeFi purposes, such as trading, investing in DeFi applications. It can even be linked to traditional investment vehicles, according to a governance proposal.
