What is MakerDAO and what’s its role in the crypto world? The process of lending and borrowing cryptocurrencies can be very challenging since digital currencies are highly volatile. This is where the MakerDAO protocol comes into play.
Namely, this protocol combines loans and stablecoins to facilitate the lending process. Although it was launched only recently, its functionality made it an important part of the DeFi ecosystem.
How does this protocol work, what are its main features, and what’s the difference between the MKR coin and the DAI token? Keep on reading to find out.
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What Is MakerDAO?
MakerDAO crypto is a protocol that runs on the Ethereum blockchain. It can also be described as a peer-to-peer decentralized platform that enables borrowing and lending digital coins using cryptocurrencies as collateral. Since Maker has a decentralized nature, the lending process will take place without the need for an intermediary.
The company issues two coins — a stablecoin called DAI, which is pegged to the US dollar, and a governance token called the MKR token.
DAI is created whenever a user locks their digital currency inside the Maker platform. If users want to take back their digital currency, they will have to return DAI. However, if the DAI value gets below a certain level, it will be automatically sold.
Who Is the Founder of MakerDAO?
The MakerDAO founder is a Danish entrepreneur called Rune Christensen. He came up with this concept of lending in 2014, and in 2017, MakerDAO was launched on the ETH mainnet. Initially, the protocol used the SAI coin, but it was soon replaced with DAI. Moreover, this protocol used only ETH as its collateral, while today, it accepts other digital currencies.
Another important year in the history of MakerDAO was 2018. It was when the Maker Foundation was founded. The goal of this foundation was to help develop the MakerDAO ecosystem.
Soon after, other companies, such as Andreessen Horowitz and Polychain Capital, started investing in this project. The MakerDAO project managed to generate $250 million. Today, MakerDAO has a market cap of $1.64 billion.
How Does MakerDAO Work?
The lending process takes place in the following way. MakerDAO platform users must lock their ERC-20 tokens and use them as collateral to generate DAI stablecoins.
Once they deposit their collateral and lock them into a smart contract, the MakerDAO protocol will create a Collateralized Debt Position or CDP. CDP’s task is to mint new DAI tokens after the collateral is deposited.
The collateral will be locked within MakerDAO’s Vaults until users repay the original loan amount. If users fail to repay the original amount of the loan, their collateral will be sold. Likewise, the value of the locked collateral must be 150% higher than the generated DAI value.
For example, if you lock 0.3 ETH you’ll get about 614 DAI tokens. However, if the value of ETH drops, you’ll have to repay the full amount of the loan as well as pay additional fees.
This protocol also enables its users to earn interest by holding their DAI tokens.
Features of MakerDAO
The key features of MakerDAO include the following:
The DAI Token
DAI is a stablecoin that is pegged to the US dollar. However, unlike standard stablecoins, DAI is not backed by fiat but by digital currencies like ETH and other ERC-20 tokens. DAI is generated when users lock their collateral on the MakerDAO platform.
The MKR Token
The MakerDAO token or MKR is a governance token that allows users to vote on decisions within the platform, such as collateral types and stability fees. In addition to that, users can use these tokens to pay fees and fines within the platform. How to buy MKR? You can buy MKR by creating an account on crypto exchanges and connecting it to your wallet.
Decentralization
The goal of the MakerDAO protocol is to ensure the stability of cryptocurrencies. It accomplishes that by using a stablecoin that doesn’t rely on a centralized institution. As such, it reduces the risk of market manipulation and it maintains the stability of its stablecoin.
Collateralization
The MakerDAO protocol allows its users to use various digital assets as collateral, such as ETH, MATIC, and WBTC. By locking their collateral into CDPs, users can get a low-interest loan that comes in the form of DAI tokens.
Transparency
The MakerDAO protocol runs on the ETH blockchain, which means that it uses open-source codes. In other words, users will be able to monitor the circulation and issuance of DAI tokens.
What Is the DAI Token?
DAI is a stablecoin created by the MakerDAO developers. It runs on the Ethereum blockchain and its value is pegged to the US dollar. The main task of this token is to facilitate crypto lending and borrowing without the need for a third party.
DAI tokens can also be used in DeFi apps and as in-game currencies in blockchain-based games. DAI’s offer is based on demand, which means that there is no maximum supply. At the time of writing, there were 5,347,888,596 DAI tokens in circulation.
New DAI tokens are generated each time a MakerDAO platform user deposits their cryptocurrencies as collaterals.
Pros and Cons of MakerDAO Crypto
The MarketDAO protocol comes with several benefits and a few downsides.
Pros Cons
MakerDAO is a good investment, for three reasons. First of all, its token is pegged to the US dollar. This means that it will be more stable than other cryptocurrencies. It will also maintain value even when the crypto market is highly volatile.
Secondly, the DAI token has multiple use cases. On that note, users can use them to buy, sell, and trade digital assets. Finally, it allows its holders to earn interest.
Conclusion
There we go! Now we know what MarketDAO is and that it’s an important part of the DeFi ecosystem. Namely, it allows lending and borrowing cryptocurrencies using ERC-20 tokens as collateral, without the need for intermediaries.
It also allows DAI holders to earn interest, while MKR holders can use their tokens to vote on changes to the platform, such as stability fees. Furthermore, MarketDAO is a transparent and secure protocol. It uses open-source codes and smart contracts to manage the process of borrowing and lending.
However, this protocol also comes with certain downsides, such as over-collateralization requirements, limited adoption, and lack of liquidity.