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What is Maker? – The Defiant

Maker, a crypto lender, is one of the pioneers of decentralized finance (DeFi), Maker uses smart contracts on the Ethereum blockchain to make loans based on DAI, a stablecoin.

MakerDAO is a cooperative organization that manages the Maker protocol. As one of the most valuable and widely used DeFi platforms, crypto investors and users are closely watching the evolution of Maker’s governance and operating model.

Since Ethereum went live in 2015, it has become host to hundreds of decentralized applications (dApps). By far the most popular are dApps for token lending, borrowing and trading, as these services can be performed without the need for intermediaries such as banks or credit scoring teams. The Maker protocol was at the forefront of DeFi.

Origin and purpose of the manufacturer

In 2014, Rune Christensen established MakerDAO for the Maker ecosystem. He is a Danish entrepreneur who studied at the University of Copenhagen.

Inspired by the Ethereum Foundation, he started the Maker Foundation in 2017. It was an umbrella body for programmers and started Maker, an open-source project to run a completely decentralized, permissionless banking system without banks.

Specifically, Maker’s mission is to generate and maintain a stable on-chain digital asset tied to the value of the dollar – the DAI stablecoin. To do this, Maker deploys smart contracts that automate loan issuance and debt/stablecoin collateralization.

At its peak in December 2021, the MakerDAO ecosystem comprised most of Ethereum’s TVL. Source: DeFillama

From this centralized beginning, the Maker Foundation gradually transferred its control to MakerDAO, the decentralized governing body of the Maker Protocol. He used MKR as a governance token that grants voting rights over all aspects of Maker’s management and development.

This transition is underway, and it has had some hiccups. At the end of 2018, the Maker Foundation created the Maker Ecosystem Growth Fund (MEGF). This fund oversees the treasury of MKR tokens to drive adoption of the MakerDAO ecosystem. Due to disagreements over how funds should be allocated, five of its nine board members have been fired by Christensen.

MakerDAO’s key product is Dai stablecoin, launched in December 2017 and backed by Ethereum. In November 2019, MakerDAO improved The DAI issuance is therefore backed by dozens of crypto assets, but primarily by USDC stablecoins.

Maker’s Dai (DAI) Stablecoin

For any blockchain lending service to be reliable, the collateral used for the loans must be stable. Therefore, Maker’s entire lending ecosystem revolves around DAI. The Maker Protocol uses smart contracts to create Maker Vaults. These are repositories of tokens in which investors add liquidity. Therefore, Maker Vaults serves as a pool of liquidity to back Dai stablecoins.

Once liquidity is added in Maker Vaults, they mint new DAI stablecoins. In turn, the newly created Dai stablecoin is backed by the provided crypto asset. Typically, investors add USDC to create a new DAI, alongside Wrapped Bitcoin and Ethereum.

DAI Collateral Allocation by Crypto Asset Types. Source: Statista

The reason for this allocation is that Ethereum and Bitcoin are cryptocurrencies with the largest market caps. Therefore, they are less prone to wild price swings that could affect DAI’s peg to the dollar. Conversely, USD Coin is the most widely used centralized stablecoin because it is 100% backed by USD liquidity reserves or equivalents.

As a result, the DAI is far from being decentralized. Nonetheless, it has the potential to be if its collateralization structure moves away from centralized stablecoins like USDC or USDT. Such a decision is in the hands of MKR token holders.

Maker’s MKR Governance

To be truly decentralized, everyone who has a stake in the protocol must be able to vote on its functionality. Like shareholders of a company, holders of MKR tokens can do so for the Maker Protocol. They can use MKR tokens as voting weights for:

  • Select the new crypto asset to add as DAI collateral
  • Determine by how much DAI oversizing with each crypto asset. This reduces or increases the risk of ankle instability from DAI.
  • Determine the staking reward rate for DAI stablecoin
  • Approve or propose new Maker upgrades
  • Select or add oracle networks that feed off-chain data into on-chain smart contracts, such as Chainlink.
  • Select the liquidation ratios for each crypto-asset securing the loans. Typically, this reflects the market capitalization of the coin; the lower it is (less than $10 billion), the more volatile it tends to be.
  • Stability and liquidation costs. The first is a commission denominated in Dai for the recovery of collateral, while the second is the commission (penalty) paid if the Maker Vault asset is liquidated.

As with all other blockchain governance protocols, MKR token holders have as much voting power as they have tokens. If a Maker Vault is deemed too risky, it is then liquidated via automated auctions, generating new DAIs.

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Since MKR token holders decide every aspect of the Maker Protocol, its governance role is also its usefulness. When a voting smart contract is launched, one MKR token equals one vote. Just as they would add liquidity to smart contract liquidity pools, MKR token holders add their stake in a vote-locked smart contract.

In addition to voting, MKR encourages responsible economic activity. If Maker’s lending ecosystem is overloaded with too much debt, MKR’s supply is increased as a backup. Because it devalues ​​the price of each MKR, it discourages irresponsible risk taking.

How Manufacturer Loan Issuance Works

Many dApps are linked to the Maker protocol to issue loans. One of them is Oasis.app. When a user wants a loan through such a dApp, the Maker Protocol issues a smart contract called Collateralized Debt Position (CDP).

Let’s say a borrower wants to collateralize their CDP loan with ETH, Ethereum’s native cryptocurrency. ETH is then used to mint the DAI stablecoin through Maker Vault. In other words, ETH serves as collateral for the loan, issued in DAI.

Once the loan is paid off, the minted DAI tokens are burned, i.e. permanently removed from the circulating supply.

Manufacturer (MKR) Tokenomics

When MakerDAO first launched in December 2017, it issued 1,005,577 MKR tokens, as its maximum bid. In September 2022, 97% of this supply was in circulation. At its highest price, MKR reached $6,339 in May 2021, reaching a market capitalization of $5.98 billion during a bullrun.

As mentioned earlier, although MKR has a maximum supply, it can always be changed by a vote, depending on the amount of debt in the system. For this reason, the value of MKR moves with the winds of the market.

For example, if the supply of DAI stablecoins exceeds the baseline needed to secure loan collateral, the excess is used to buy MKR tokens and burn them. When this happens, the circulating supply of MKR is reduced, which usually increases its price, in accordance with the economic law of supply and demand.

In addition to decentralized exchanges, like Uniswap, the Maker Token is available on all major exchanges, such as Binance, Coinbase, Kraken, and OKX.

Series Disclaimer:

This article in the series is intended for general guidance and informational purposes only for beginners participating in cryptocurrencies and DeFi. The content of this article should not be construed as legal, business, investment or tax advice. You should consult your advisers for all legal, business, investment and tax implications and advice. The Defiant is not responsible for lost funds. Please use your best judgment and exercise due diligence before interacting with smart contracts.