Maker: Everything to Know
By Beluga Research August 11, 2023
Summary
- Maker is a decentralized cryptocurrency platform on the Ethereum blockchain that enables the creation and management of stablecoins.
- Maker began as eDollar but shifted focus to building a stablecoin platform with the emergence of Ethereum
- The Maker ecosystem consists of the Dai stablecoin and the Maker governance token
- Users can generate Dai by depositing collateral into a CDP, and MKR holders participate in decision-making and stability management
Overview
Maker is a decentralized cryptocurrency platform on the Ethereum blockchain that enables the creation and management of stablecoins. The project gained significant attention during the 2017 cryptocurrency boom and has since become one of the most influential DeFi platforms.
At its core, Maker operates as a decentralized lending and stablecoin platform, offering users the ability to generate Dai, a stablecoin pegged to the value of the U.S. dollar. Unlike traditional stablecoins that are backed by a central entity, Dai is backed by collateral stored on the Ethereum blockchain.
A Brief History
Maker was founded in 2014 by Rune Christensen, a Danish entrepreneur. In its early days, it faced various challenges and iterations before reaching its current form. Initially, the project was known as eDollar, aiming to create a decentralized digital currency. However, with the emergence of Ethereum, the team recognized the potential of smart contracts and shifted the focus to building a stablecoin platform. In 2017, MakerDAO, which stands for "decentralized autonomous organization", conducted an initial coin offering (ICO) and raised funds for further development.
One of the key milestones for MakerDAO was the launch of the Dai stablecoin in December 2017. Dai introduced an innovative approach to stability by employing a system of collateralized debt positions (CDPs). Users could lock up Ethereum-based assets as collateral and generate Dai against it. This mechanism allowed Dai to maintain stability even in volatile market conditions.
Maker: Everything to Know
To understand Maker, it's crucial to grasp its core components and how they interact. The Maker ecosystem consists of two main tokens: Dai and Maker (MKR). Dai, as mentioned earlier, is the stablecoin generated on the platform. It is designed to be decentralized, transparent and maintain a 1:1 peg with the U.S. dollar.
MKR, on the other hand, serves as the governance token of the MakerDAO ecosystem. Holders of MKR have voting rights and actively participate in the decision-making process of the platform. They vote on various proposals, including changes to the platform's parameters, risk management policies and collateral types accepted by the system. MKR holders also play a crucial role in managing the stability of the Dai stablecoin.
The stability of Dai is maintained through the use of CDPs, which are smart contracts that lock up collateral in exchange for generated Dai. The collateral-to-debt ratio determines the amount of Dai that can be generated. If the value of the collateral falls below a specified threshold, a liquidation process is triggered to ensure the stability of the system.
Getting Started
To get started with Maker, users need to have an Ethereum wallet and some ether (ETH) to pay for transaction fees. Once set up, users can interact with the Maker protocol through the MakerDAO platform. The primary function of MakerDAO is to generate Dai, the stablecoin created and governed by Maker. To generate Dai, users need to deposit cryptocurrency assets as collateral into a smart contract called a Collateralized Debt Position (CDP). The collateral is used to secure the value of Dai and maintain its stability.
After depositing collateral, users can generate Dai by borrowing against their collateralized assets. The amount of Dai that can be borrowed depends on the value of the collateral and the collateralization ratio set by the Maker community. It is important to note that borrowing Dai creates a debt obligation, and users are required to pay back the borrowed Dai along with accrued stability fees to unlock their collateral.
Unique Aspects
One of the unique aspects of Maker is its decentralized governance model. MKR token holders, who have a stake in the Maker ecosystem, can participate in the decision-making process by voting on proposals that impact the protocol. This decentralized governance allows MKR holders to collectively decide on parameters such as stability fees, collateral types and risk management strategies. This democratic approach ensures that the protocol remains adaptable and responsive to the evolving needs of its users.
Another notable feature of Maker is its stability mechanism. To maintain the value of Dai at $1 USD, a system of autonomous feedback mechanisms is employed. If the price of Dai deviates from its target, the protocol automatically adjusts stability fees and incentivizes users to either generate or burn Dai, thus stabilizing its value. This mechanism helps Dai maintain its stability even during periods of market volatility, making it an attractive option for users who seek a stable store of value within the cryptocurrency ecosystem.
Advantages
- Stability - MakerDAO's primary advantage is its ability to maintain stability in the price of DAI. By pegging the value of DAI to the U.S. dollar, it provides users with a reliable and predictable digital currency that can be used for various transactions without worrying about price volatility.
- Decentralization - MakerDAO operates as a decentralized autonomous organization, which means that decisions are made collectively by the community of token holders. This decentralized governance model ensures that no single entity has control over the system, making it resistant to censorship and manipulation.
- Transparency - The smart contracts governing MakerDAO are open-source, which means that anyone can review and audit the code. This transparency helps to build trust among users and ensures that the system operates as intended without hidden vulnerabilities or malicious intent.
- Collateralized Debt Positions (CDPs) - Maker's stability mechanism relies on the creation of CDPs, where users lock up their crypto assets as collateral to generate DAI. This allows users to access liquidity without selling their cryptocurrencies, enabling them to hold onto long-term investments while still leveraging their value.
- Inclusive Access - MakerDAO provides financial services to individuals who may not have access to traditional banking systems. With MakerDAO, anyone with an internet connection can create a CDP and generate DAI, providing them with a stable currency that can be used for various purposes, such as remittances or everyday transactions.
Disadvantages
- Overcollateralization Requirement - To generate DAI, users must lock up more collateral than the value of the DAI they wish to create. This overcollateralization requirement ensures the stability of the system but also limits the amount of DAI that can be generated. It can be a barrier for individuals who have limited crypto assets to use as collateral.
- Volatility Risk - While DAI aims to maintain stability, its value can be affected by extreme market conditions or systemic risks. Although MakerDAO has mechanisms in place to mitigate these risks, such as the ability to trigger global settlement to protect the system, there is still a potential for DAI to deviate from its intended peg in certain scenarios.
- Governance Complexity - MakerDAO's decentralized governance model requires active participation from token holders to propose and vote on changes to the system. This process can be complex and time-consuming, leading to potential delays in decision-making and the implementation of necessary updates or improvements.
- Centralization of Power in Voting - Despite being a decentralized organization, there is a risk of centralization of power in the voting process. Token holders with a significant amount of MKR (MakerDAO's native token) have more influence over the decision-making process. This concentration of power may raise concerns about potential manipulation or the exclusion of smaller token holders from decision-making.
- Smart Contract Vulnerabilities - While the open-source nature of MakerDAO's smart contracts promotes transparency, it also exposes them to potential vulnerabilities. Any flaws or bugs in the code could be exploited by malicious actors, leading to the loss of funds or disruption of the system. Regular audits and security practices are crucial to mitigate these risks.