What is MakerDAO (MKR)?

What is MakerDAO (MKR)

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MakerDAO is a decentralized autonomous organization (DAO) built on the Ethereum blockchain that aims to provide a stable coin called DAI, which is pegged to the value of the U.S. dollar.

The core component of MakerDAO is a system of smart contracts that governs the creation and redemption of DAI. Users can “lock up” ether (ETH), the native cryptocurrency of the Ethereum network, as collateral in the system, and in return, they can mint an equivalent value of DAI. The amount of DAI that can be minted is determined by the collateralization ratio, which is the ratio of the value of the collateral (in ETH) to the value of the DAI. The collateralization ratio is maintained above a certain threshold to ensure the system remains stable, currently at 150%.

Users can also redeem their DAI for an equivalent value of ether, but they must first pay back the DAI they borrowed and a stability fee, which is a small percentage of the total borrowed. The stability fee is used to incentivize users to redeem their DAI when the price of ether falls, which helps to maintain the collateralization ratio.

The MakerDAO system is governed by MKR token holders, who can vote on changes to the system, such as changes to the collateralization ratio and stability fee. The MKR token is a governance token that gives holders the right to vote on changes to the system and acts as collateral.

MakerDAO Features

MakerDAO is a decentralized platform built on the Ethereum blockchain, and it has several features that make it unique:

  1. Stablecoin: The main feature of MakerDAO is its stablecoin, DAI, which is pegged to the value of the U.S. dollar. This means that the value of DAI remains relatively stable, making it useful for everyday transactions and as a store of value.
  2. Collateralized debt position (CDP): The process of minting DAI is called creating a collateralized debt position (CDP). Users can lock up ether as collateral in the CDP, and in return, they can mint an equivalent value of DAI. The amount of DAI that can be minted is determined by the collateralization ratio, which is the ratio of the value of the collateral to the value of the DAI.
  3. Governance: MakerDAO is governed by MKR token holders, who can vote on changes to the system, such as changes to the collateralization ratio and stability fee. This decentralized governance structure allows the community to decide the direction of the protocol.
  4. Risk management: To ensure the system’s stability, the collateralization ratio is maintained above a certain threshold. Additionally, the system includes a Stability fee, which is paid by the users who borrow DAI; this incentivizes users to repay their debt and helps the system to remain stable during market volatility.
  5. Open-source and permissionless: MakerDAO is open-source, meaning anyone can access and review the code, and it is also permissionless, meaning that anyone can use the platform without having to go through a centralized entity or intermediary.
  6. Multi-Collateral DAI (MCD): In November 2019, MakerDAO upgraded its protocol to support multiple assets as collateral to mint DAI, not just Ethereum anymore. This can be done by creating another version of CDP (vaults) where other assets are used as collateral. This increases the DAI’s stability and provides more flexibility to the system.

What is MKR Token and How Does it Work?

MKR (Maker) is the governance token of the MakerDAO decentralized autonomous organization (DAO) built on the Ethereum blockchain. The MKR token has two main functions within the MakerDAO ecosystem: it is a governance token and acts as collateral.

  1. Governance: MKR holders can vote on changes to the system, such as changes to the collateralization ratio and stability fee. By holding MKR, token holders can influence the direction of the MakerDAO protocol; this is a way to align the stakeholders’ incentives to the system.
  2. Collateral: In addition to being a governance token, MKR is also used as collateral in the MakerDAO system. This means that users can lock up MKR in the same way they can lock up ether, and in return, they can mint an equivalent value of DAI. This allows MKR holders to participate in the creation and stability of the DAI ecosystem.
  3. Risk Management: The MKR token also plays a role in risk management. Suppose the value of the collateral falls below a certain level. In that case, the system may require additional MKR to be locked up as collateral, or MKR tokens may be sold on the open market to stabilize the system. This mechanism is called the “emergency shutdown” and aims to ensure the system’s stability.
  4. Inflationary: MKR tokens are inflationary; new tokens are periodically created and distributed to those who hold the token to fund the protocol’s development.
  5. Burning: MKR is also used to pay the stability fee paid by those who borrow DAI; when they pay back the borrowed DAI, the MKR is burned (destroyed); this process helps to control the supply of MKR in the market.

By holding and participating in the MKR token, holders can shape the MakerDAO protocol’s development and earn a return on their investment through the inflationary mechanism and the burning of tokens paid as a stability fee.

In Summary

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The overall goal of MakerDAO is to provide a stable and decentralized alternative to traditional fiat currency. By pegging the value of DAI to the U.S. dollar, MakerDAO aims to create a stablecoin that can be used for everyday transactions and to hedge against other cryptocurrencies’ volatility.

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