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Jul 20, 2020

11 min

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11 min

What is MakerDAO: Complete Guide

MakerDAO guide

MakerDAO is a decentralized organization built on the Ethereum blockchain. It’s designed to allow people to borrow and lend in crypto, in processes that are executed using smart contracts. 

You are probably wondering how this happens yet cryptocurrencies are highly volatile, right? Well, the MakerDAO ecosystem uses a stable coin called DAI in pricing lending rates and amounts repayable. The MakerDAO ecosystem also has another token called MKR (More on this later). 

In this article, we will focus on the history of MakerDAO, how it works, and its advantages to the crypto ecosystem, especially in decentralized finance (DeFi). 


Brief History 

MakerDAO was founded by Rune Christensen in 2014 and has its headquarters in Santa Cruz, California. In 2018, MakerDAO received a capital boost of $15 million from Andreessen Horowitz. He bought 6% of the total Maker (MKR) in circulation. At this point, MakerDAO is the longest-running project on the Ethereum blockchain. The project has more than 2.3 million Ethereum in its protocol, about 2% of the total Ethereum in circulation. 

Currently, the MakerDAO team has 11 members. Besides Rune Christensen, who is the CEO, the core members of the team are:

  • Steven Becker, (COO)
  • Andy Milenius (CTO)
  • Soren Peter Nielsen (Head of product)
  • Jacek Czamecki (General Counsel)
  • Arran Kitson (Senior Digital Asset Analyst)
  • Matthew Cooper (Business Development, Account Manager)
  • Gustav Arentoft (Business Development)
dai 2014


MakerDAO Technology and Advantages

MakerDAO has several advantages that make it a key player in the decentralized finance ecosystem. They are as below:

It solves the Tether (USDT) problem

The use of stable coins is not unique to MakerDAO. In fact, the most widely used stable coin in the market is Tether (USDT). However, Tether has several problems that make it a weak link for the entire crypto ecosystem. One of the disadvantages of Tether is that it is centralized. It is run by the same people who run Bitfinex, and there are controversies around it. In a situation where the people behind Bitfinex go under, Tether could collapse as well.

 MakerDAO stable coins do not have this problem because they are decentralized. Unlike Tether generated from a central source, new DAIs are created through user-generated collateralized debt positions (CDPs). 

Users lock-in Ethereum in smart contract pools and create CDPs. It is the CDP that then makes the user’s DAI while giving out interest on the total Ethereum pooled. In essence, there is no single point of failure for DAI. This stable coin would be a safe bet if USDT fails.

It creates transparency in the crypto ecosystem

Centralized coins dominate the stable coin ecosystem. While they work pretty fine, there is always the issue of transparency. For instance, if a single source only generates a stable coin, the market can never know if the coins in circulation are backed 1:1 by actual dollars. This poses a risk because a discrepancy could lead to collapse and negatively impact the entire crypto ecosystem.

MakerDAO stable coins do not have this problem. That’s because the DAI stable coins are created through collateralized debt positions, as mentioned above. As such, there can never be a hole in the funding of all DAI in circulation.

MakerDAO solves the Bitcoin manipulation problem

There has been a growing issue in crypto with regards to Bitcoin Tether manipulation. Reports are showing that anytime new Tether enters circulation, the price of Bitcoin rises. Even more damning are reports that up to 80% of Bitcoin’s value is derived from Tether.

MakerDAO stable coins solve this problem because all DAI’s generated are recorded on the blockchain, and execute based on instructions put on the smart contract. This makes it a solution to the problem of Bitcoin manipulation.

money MKR & DAI


How does MakerDAO work?

MakerDAO is a credit facility that gives loans at a predetermined interest rate. The process starts with an Ethereum deposit into a Maker smart contract, which creates a collateralized debt position (CDP). 

For context, if Ethereum is trading at $100 and a user deposits 1 Ethereum at a hypothetical collateralized rate of 150%, they would be allowed to receive 40 DAI. If the price of Ethereum drops below $100, the user gets automatically closed out of their position. For such a user to get their Ethereum back from the MakerDAO, they would need to pay back the amount they received and a fee. The same concept applies to any amount of Ethereum and at any price. 

The entire system is controlled by a MakerDAO native token called MKR. Holders of the MKR token have control of various aspects of the protocol that includes annual borrowing, the amount of collateral for CDPs, and shutting down in case of an emergency Ethereum crash. It is the MKR that also makes the MakerDAO a fully decentralized system. 

It is also important to note that when fees are paid, a dollar value of the MKR is bought out of the market, and used to pay the stability fee. The working of MakerDAO can be summed up in the loop cycle below:

  1. User opens a collateralized debt position
  2. If Ethereum depreciates, the user gets closed out and pays a fee.
  3. If Ethereum price appreciates, the user draws DAI from the CDP
  4. The user buys more Ethereum with newly created DAI 
  5. The user adds more Ethereum to their CDP to protect against a drop in Ethereum value.
  6. Cycle repeats. 


Perspectives and takeaways

While decentralized finance is still way off from going mainstream, it is gaining traction. This is driven by the fact that huge segments of the world population do not have access to centralized financial systems. As an alternative decentralized system takes root, MakerDAO and its decentralized lending ecosystem will grow too. 

On top of that, the issue of Bitcoin control by Tether will ultimately drive the market towards decentralized stable coins, and MakerDAO is one of the oldest and most tested on this front. The MakerDAO is also constantly innovating and recently introduced multi-collateral DAI. This entails allowing users to make DAI stable coins that are backed by multiple crypto assets. 


Views on MakerDAO

Since its launch, the MakerDAO has grown in popularity because it is at the core of decentralized finance. With more people getting into decentralized finance, commentary on DAI in the media by top voices in crypto has been on the rise. In 2018, Ethereum founder Vitalik Buterin twitted that, “MakerDAO is great” and got lots of positive feedback about it.

dai coin

Another interesting comment is by Arentoft concerning the launch of multi collateral DAI. He stated that “It’s very similar to having a US dollar-denominated savings account. It works as a form of staking, the savings accounts will take some part of the profits from the system and distribute them back to the users on the system. One of the benefits of having a decentralized system is that we don’t have to abide by traditional monetary policy but can instead focus a lot more on helping people.”


MakerDAO Website

For complete information about MakerDAO visit https://makerdao.com/en/


MakerDAO Github

For complete information about the MakerDAO code, visit https://github.com/makerdao 


MakerDAO Twitter

Follow @MakerDAO for the latest news on MakerDAO.


MakerDAO Reddit

Join MakerDAO subreddit r/MakerDAO to discuss MakerDAO with the rest of the DAO community. 


How to store and manage MKR & DAI

Atomic wallet is one of the most secure multi-currency wallets for managing Maker tokens. The first step in hodling them is to download Atomic wallet. Next, create a password and store the 12-word automatically generated backup phrase in a safe location. 

Next, send the Maker tokens to your wallet for safe storage. Besides the password and the mnemonic phrase, your private keys never leave your device. On top of that, you can buy more MakerDAO tokens, or exchange them for other cryptos in the wallet.


Conclusion

MakerDAO tokens DAI and MKR are supported by Atomic wallet and many other wallets. MakerDAO is at the center of the growing DeFi ecosystem because it is decentralized, and allows for lending and borrowing using crypto. With the introduction of multi-collateral DAI, the future of MakerDAO is bright. 

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