Stablecoins are really about taking blockchains and making them useful for the real world, right now. MakerDAO has been dedicated to pushing that vision forward.
Launched in 2017, MakerDAO is basically a digital vault system where users can deposit a number of Ethereum-based cryptocurrencies and use them to mint DAI, the native stable coin of the Maker ecosystem.
Think of it like going to a bank to get a loan, but without having to ask permission or do stuff like provide documentation or boost your credit rating.
Instead of requiring trust, the loan itself is protected by the value of the assets you deposit, which, in the case of Maker’s first asset Ethereum, has to stay above 150% of the value of the DAI dollars that you borrowed.
Any sudden drop in the price of Ethereum could see your “collateral level” drop below 150%, and liquidation of your digital assets start to occur.
For this reason, users of Maker vaults are recommended to keep their collateralization rate as high as possible, to mitigate against any potential loss of funds.
The real crux of Maker is that the system uses the opening, closing, and liquidation of these Collateralized Debt Positions as a mechanism to keep the DAI stable coin at or close to its 1 dollar ‘peg’, ensuring that its value stays the same without any centralized interference.
This solution made DAI the first decentralized stablecoin on the market, and for that reason it has a lot of support and functionality across the entire crypto industry.
Aside from its role with the Maker ecosystem, DAI is also used as a trading pair and as a stable coin that gives holders generous rewards in lending, saving, and farming across a suite of DeFi applications like Compound and Aave.
More recently though, DAI’s use case also includes being a cryptocurrency for the purchase of NFTs and digital art. It also includes integration for gaming platforms and for e-commerce businesses like Shopify and WooCommerce.
Maker was created by its CEO, Rune Christiansen. Prior to Maker, Christensen was the co-founder of Tri China and holds degrees in biochemistry and international business.
Rune discovered bitcoin early on when he saw a bitcoin address on a LulzSec page. LulzSec was a black hat computer hacking group that claimed responsibility for dozens of high-profile attacks, including taking the CIA website offline.
LulzSec would take out a website and replace it with a bitcoin donation address. Rune noticed the address on one of their hacked sites and decided to look up what it meant. From there, he went down the rabbit hole of crypto. He said he was blown away by the ideas behind bitcoin, decentralization, and self-sovereign money.
He was an observer of the whole history of crypto over the years and invested in bitcoin. What got him most involved in the space was one of bitcoin’s first big bubbles and crashes.
He put all his money into Bitcoin at about $80, and the price went up into a bubble of about a thousand at the time. Then it crashed all the way back down.
At the very bottom, he said he decided that regular people are not going to accept that kind of volatility. That’s how he discovered stablecoins - which already existed at the time but were in their infancy.
He discovered the project BitShares, which was the first project to invent stablecoins. He was part of the BitShares community and supported that project. But, he felt like it was doing too many things at once, and never really gained traction.
That’s when Rune and a number of other people from that project started Maker.
To this day, there are plenty of designers, engineers and developers from around the globe supporting the maker project.
During a recent celebration of the minting of over 1 million DAI tokens, Rune Christensen said:
“One billion DAI in circulation is a powerful validation that people around the world want more access, more opportunity, and more control over their finances.”
MakerDAO has had quite a few hurdles to get to where they are at now. In March 2020, the price of ETH and most other cryptos took a huge tumble after the financial crash triggered by covid.
This caused a series of liquidations on Maker which were exacerbated by congestion on the Ethereum network as users scrambled to close or short their debt positions.
This led to a host of problems which centered mostly around the failure of the liquidation process, leaving the platform with some unhappy users, over a million dollars worth of undercollateralized DAI, and a temporary loss of DAI’s one dollar price peg.
Maker responded by implementing a number of solutions -- that included an improved liquidation mechanism and a number of stablecoins as accepted collateral in maker vaults.
This made it easier for users to increase their collateralization rate in a volatile market.
Maker has also introduced multi-collateral DAI -- which allows users to deposit a host of other ETH-based assets like BAT, Kyber network and 0x, at a collateralization rate of 175%.
Multi-collateral DAI includes a DAI savings rate, plus more CDP collateral types (more on what that is in a moment).
Moreover, with the upgrade to multi-collateral DAI, the MKR token will take on a more significant role in the broader ecosystem. Instead of using the pooled Ether as the recapitalization resource, MKR will be sold in order to raise the funds to recapitalize the system.
As a Decentralized Autonomous Organization, or DAO, Maker allows anybody to propose governance votes to seek improvements for the protocol. But, only those who hold the MKR token can actually participate in voting, which may be one reason why a number of venture capital funds have strategically acquired significant chunks of the MKR supply, and more are expected.
MKR holders also benefit indirectly from helping to grow and improve the functionality of the platform. User fees are collected in DAI and then used to buy MKR, which is then burned—reducing the overall supply.
There is huge market support for MakerDAO and the whole decentralization ethos of open access to finance.
This is reflected by the fact that Maker is still the DeFi protocol with the most value locked into it. Due to the first-mover advantage, the expanding DAI ecosystem, and the obvious benefits of leveraging crypto savings during a bull market -- that number isn't likely to drop any time soon.
Deeper Dive Into MakerDAI
MKR is essentially a functional token that allows holders to govern the Maker system. So ownership of the Maker token gives you a stakeholder position in the broader Maker ecosystem.
By owning a Maker token, you're able to take part in the maintenance of the entire Maker ecosystem. This includes its stable coin, DAI, which we’ll touch on in a moment.
Maker’s value is directly tied to the success of its products and the upkeep of its projects. This ERC20 token aims to help stabilize cryptocurrencies in order to help drive the adoption and growth of the industry.
Because of how it's valued, Maker is more stable than many other cryptos currently traded on the market. Which begs an important question:
Where does Maker get its value?
Maker’s value is tied to that of Dai, which is its decentralized stable coin pegged to the USD. That means one DAI is equal to one USD. Just like Tether, for example.
The purpose of the token is to stabilize DAI through the use of collateralized debt positions, or CDPs.
So what is a CDP on the Maker platform?
When using a CDP, users deposit their assets into a smart contract. These assets are considered collateral for a loan.
Once the assets are deposited, the user has the ability to generate the equivalent value they want to borrow in DAI.
At that point, the user can do whatever they want with their DAI, just like they can with any other digital coin. There are no restrictions on how users can put their cryptocurrency to use.
Keep in mind that purchasing DAI results in debt. The debt helps to stabilize the value as it locks the collateral deposited within the CDP until it is paid back at a later time in DAI.
When the DAI gets paid, the user can then withdraw their collateral. At that point, they can start trading again, completing the circle.
A direct correlation exists between Dai and the amount of collateral used for the CDP. As there’s an increase in the need for DAI, the CDP increases. This results in more MKR.
MKR has three primary uses on the Maker platform: As a utility token, as a governance token, and as a resource for recapitalization.
So let’s take a look at these roles:
1. Utility Token:
Only MKR can be used to pay fees on CDPs within the Maker system. When the fees are paid, the MKR is removed from the total supply, or “burned.”
As MKR is burned, the overall supply of MKR will decrease. As the demand for CPDs and DAI goes up, the demand for MKR will also go up.
2. Governance Token:
Holders use their MKR to vote for the logistics and risk-management pieces of the Maker platform. The Maker voting process goes through a process called continuous approval voting.
This means users holding MKR can vote for certain proposals using the MKR they hold. Anyone holding MKR can also create and submit new proposals if they so choose.
Voters have the choice of casting or withdrawing votes for any given proposal at any time. The proposal that receives the most votes is considered the top proposal and can then be implemented into the Maker system.
3. Recapitalization Resource:
If certain pieces of the collateral portfolio don’t meet the collateralization it needs, then the maker system will automatically create and sell MKR tokens.
Doing this immediately raises capital to meet the shortfall of value within the maker system.
As a result, the entire system is no longer insolvent.
Having this type of system on the Maker platform creates a system that should align voter interest with the interests of the system itself.
Emergency Shutdown feature:
Emergency shutdown is a process that will stop and settle the Maker protocol to ensure that everyone on the platform -- both CDP holders and DAI holders — receive the value of the assets to which they’re entitled.
Essentially, it allows DAI holders to redeem their DAI for collateral in the event of an emergency shutdown.
While the chances of such a situation arising are low, emergency shutdown is in place as a last resort so the Maker system is protected against a serious threat.
MKR Token Dynamics
There was no ICO for MKR tokens. Instead the project was meticulous and selective about when and where they offered MKR tokens for sale.
While anyone was and still is able to purchase MKR, doing so initially required more interaction on the part of the buyer than would typically be required during an ICO or crowd sale.
For example, the maker team said the process used to raise their initial funds was kept this way so they could remain selective about who they invited to participate -- and ensure that those who did were rational stakeholders.
Maker currently sits at 45th crypto in terms of total market capitalization and currently has 901,300 MKR circulating.
The tokens saw an all time high of $6,298.23 last May, and have since fallen to $3,072.68.
This is much less pronounced than many of the other alt coins, because of the unique relationship it shares with the CDPs and DAI.
As Markets have been in flux, there's been an increase in the need for stablecoins and thus more utility demand for MKR.
Markets for the MKR token:
MKR tokens do considerably less daily volume when compared to their immediate peers.
Since the token is deflationary, even if demand stays the same, the price will rise. But there’s a very good chance demand will increase with all the developments and uses for MKR we haven’t seen yet.
MKR has its own viable product -- DAI -- and offers a transparent system that connects the investor token to the product itself.
There’s also a lot more coming in the roadmap. They have a scaling and multi-chain strategy planned for the future.
As a holder of the MKR token you’re tasked with preserving its decentralized governance. There are also a host of other stablecoins that have entered the fray as well: Paxos, PAX, USDC, Gemini dollar, ect. Some traders may prefer these given their ease of stable coin conversion.
Either way, stable coins are considered by many to be a significant step forward in the world of cryptocurrencies. And some people think they may be the key to mass adoption. But we invite you to take this information and come to your own informed conclusions.
This data report is provided by Keystone Investors Research. Keystone is the only Cryptocurrency research firm that is Officially partnered with a government regulated Cryptocurrency Trading Platform.
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