Hey people :) There goes my second post, this time on MakerDAO's ecosystem. In case you have missed my previous post on BAT & Brave, you can read it here. Enjoy!
1. What is Maker MKR?
Maker (MKR) is the utility token used primarily for governance and stability fees in the Decentralized Finance (DeFi) platform known as MakerDAO. Built on top of Ethereum, the MakerDAO smart contract platform allows users to take out collateral-based loans in the form of their proprietary and decentralized stablecoin, DAI & SAI. Users will deposit accepted collateral cryptocurrencies, such as Ethereum, and will be able to take out a loan in Dai according to how much collateral they front.
MKR and Dai help to form the dual-coin MakerDAO stablecoin ecosystem. Dai is pegged to the US Dollar and can only be created by depositing collateral into a smart contract known as a “Collateralized Debt Position” (now known as Vaults). This creates a platform that is truly decentralized as Dai cannot be printed.
For a user to reclaim their ETH collateral, they must pay back any outstanding Dai to the smart contract, along with a small stability fee to be paid in MKR. This stability fee helps to keep Dai pegged to the US Dollar. The MKR token is also used in governance decisions such as how much the stability fee should be and what the collateralization ratio should be.
2. How many Maker MKR tokens are out there?
In total there will only ever be 1 million Maker (MKR) tokens in existence and they are all out there in circulation. The fact that all of the MKR tokens have been released helps for price discovery as there is no expected influx of MKR tokens to inflate the market and push the price down. There was no ICO for MKR; instead, the team decided to sell MKR initially though private sales with investors and then publicly through a marketplace.
One very interesting to understand regarding the circulation of MKR is that it is constantly being deflated. Once a Collateralized Debt Position (CDP) has been established by a MakerDAO user, they must pay a stability fee in MKR (plus the original loan amount in Dai) for them to be able to retrieve their collateral from the MakerDAO platform. The stability fee that is paid in MKR is then burnt, effectively removing this MKR from the total circulating supply. This means that, over time, there will be less than 1 million MKR tokens in circulation and this number will continue to decrease indefinitely. As of early 2020, there have been a total of 10,760 MKR tokens burned and removed from the circulating supply.
3. Who and when created Maker MKR?
Maker DAO was founded in 2014 by Rune Christensen after he left the BitShares community. It was created to address some of the broken issues in traditional finance and Christensen felt that this could easily be fixed with blockchain technology. He set out to create a complete decentralized finance (DeFi) platform that would be completely autonomous and self-governing. MakerDAO went on to release their first version of the protocol in 2017.
Announcement post on Reddit made by Rune. Back then DAI was called eDollar
In traditional finance, the majority of people are excluded due to not being part of the banking system or having bad credit. These are two of the major issues that DeFi seeks to mitigate and Christensen believes that everybody should have the right to an equal opportunity in managing their finances, regardless of background, job security, or previous credit history. He wanted to create a platform that was financially inclusive as he felt that this would change the lives of many people who were alienated by the traditional financial system.
In creating Maker DAO, Christensen achieved the goal he set out to tackle as he created a completely decentralized and permissionless financial platform in which all loans are backed by on-chain collateral through smart contracts. This means that there is no central authority issuing the credit or holding the collateral.
4. What is DAI in crypto?
In cryptocurrency, DAI refers to the decentralized stablecoin that is physically backed by cryptocurrency locked up in smart contracts as collateral on the MakerDAO platform. Users on the platform send cryptocurrency as collateral to a smart contract to generate Dai as a loan. Dai is pegged to the US Dollar and remains at a 1:1 ratio due to the dual-token system and the stability fee that MakerDAO has created.
Dai can be generated by opening a Collateralized Debt Position (CDP) on the MakerDAO platform. This is the only way that Dai can be generated and for this reason, it is often considered as the only true decentralized stablecoin that is not issued by a central party as with other stablecoins such as Tether. Once it is created, you can do anything you wish with your Dai such as spending or buying other cryptocurrencies.
Dai is an ERC-20 token that is built on top of the Ethereum blockchain and is backed by collateral such as Ethereum and Basic Attention Token - whichever the user decides to “lock-up” as collateral in the MakerDAO smart contract to take out the loan.
The day Multi-Collateral DAI went live. Source
5. What is SAI?
Sai is a stablecoin that could be issued by depositing only Ethereum into a Collateralized Debt Position (CDP) on the MakerDAO platform. Initially, Sai was known as Dai, however, in November 2019 the Maker team introduced new forms of collateral that could be used to take out Dai loans on the platform and needed a way to distinguish between the old Dai that was created by depositing only Ethereum into the CDP and the new multi-collateral Dai that can be created with a host of cryptocurrencies as collateral.
The Maker team decided to go with a terminology change and renamed the old outstanding Dai to Sai to represent the Single-Collateral Dai previously taken out by depositing Ethereum into a CDP. Dai itself, now with a completely new logo, refers to the new Multi-collateral Dai that can be created by depositing ETH, BAT, 0x, OMG, and GNT into a CDP (now known as a “vault”) on the MakerDAO platform. The team decided to go with a terminology change as they felt that the old terminology was unnecessarily complicated for the average user to understand.
6. Why is Maker built on Ethereum?
Maker is built on top of Ethereum as it is one of the most powerful decentralized operating systems in existence and offers all of the protocols needed for Maker to be able to function effectively. Firstly, Ethereum allows for Smart Contracts to be created and executed. These are decentralized contracts that are only filled if the required parameters of the smart contract are met. This allows for Maker to offer decentralized loans in the form of Dai when users lock away their Ethereum (or other accepted ERC-20 tokens) into the MakerDAO smart contract. The smart contract will hold the Ethereum in escrow until the loan has been repaid to the smart contract, at which point the Ethereum will be released to the owner.
Secondly, as Maker is built as a platform on top of the Ethereum blockchain, its cryptocurrencies are issued as ERC-20 tokens. This means that anybody with an Ethereum wallet can easily send and receive Dai and MKR and pay minimal fees. Finally, building on top of Ethereum removes the problem for Maker of building their own blockchain, something in which they would have to attract enough resources to keep it maintained and secure. Instead, Maker can simply focus on improving the security and stability of their dApp and allow for the world’s second-largest cryptocurrency to run it smoothly. As of early 2020, the MakerDAO smart contract has never failed since its creation.
7. How does SAI & DAI remain stable?
Dai and Sai are currently soft pegged to the US Dollar at a ratio of 1:1 and maintain this stability through what is known as the Target Rate Feedback Mechanism (TRFM). This TRFM constantly compares the Dai Market Price to the Dai Target Price and kicks in if there are any fluctuations during times of extreme volatility.
The TRFM basically changes the “interest rate”, known as the Dai Savings Rate, involved in creating Dai, similar to how banks adjust their interest rates to meet their targets. The way it works is that, when the TRFM kicks in, the Target Rate and Target Price change to balance the supply and demand of Dai which, in turn, changes the incentive for users to either generate or hold Dai.
As an example, if the market price for Dai drops beneath the $1 soft peg, the TRFM will turn positive to create a higher Target Price to make the creation of Dai more expensive. This means that the Dai Savings Rate will increase, causing a decrease in the supply as users are incentivized to hold Dai which increases the demand.
8. What is compound DAI?
Compound Dai is a cToken contract issued by the Compound protocol that allows users to lend Dai to others to earn interest. On their platform, you deposit Dai and receive cDai (compound Dai) which allows you to earn interest on the Dai that you have lent. For a user to receive their Dai back, they simply send the cDai to the platform to gain access to their Dai.
Compound.Finance has created a system in which users can now earn interest whilst lending certain cryptocurrencies. Their protocol, built on top of Ethereum, allows for the establishment of money markets in which the interest rates are algorithmically derived, based on the supply and demand. In the case of Dai, instead of just holding your Dai you can lend it out to other borrows and earn interest on what you have lent out. However, like anything, there are certain risks involved with lending your Dai for compound interest. Firstly, as Compound is a centralized service, this means that you have to trust the administrator to keep their private keys safe. If their keys are compromised, your funds are at risk. Secondly, when you lend on Compound, there is no actual guarantee that you can withdraw at the time of your choosing. For example, if you try and withdraw your Dai but the money is locked in outstanding Compound Finance loans, you will not be able to withdraw your funds.
Currently, the Compound interest rate for lending out Dai is a staggering 14.6%.
9. Who governs Maker DAO?
MakerDAO is a Decentralized Autonomous Organization - hence the DAO. This means that there is actually no centralized entity that governs it and instead the governance is handed over to the entire Maker community. If you hold MKR you are instantly part of the community and get to have a vote in any governance changes within Maker DAO.
The governance on Maker is done through a voting system in which users can cast their votes on specific proposals that are put forward by the Maker team or other community members. Like any other vote, there is a period where users can cast their vote and then the team behind Maker will implement the winning decision.
Currently, MKR holders have a strong influence on many risk parameters on the Maker DAO platform. These include things such as which cryptocurrency can be used as collateral, how much debt can be issued at one time, what the interest rate will be, and the level of fees. This is all done on-chain through the Governance Dashboard. Voting is weighted by the amount of MKR that votes for a specific proposal which means that the votes with the most MKR will always win - regardless of how many people vote.
10. How secure is Maker DAO?
Maker DAO is considered to be pretty secure considering that the Maker DAO smart contract did not break when Ethereum plummeted by over 93% during 2018/19. This because all of the debt on the Maker DAO platform is over-collateralized. This means that users put in a higher value of collateral into the Maker DAO platform than the value of Dai that they take out. They do this as Ethereum is pretty volatile still and small movements could easily close a large amount of Collateralized Debt Positions (Vaults).
However, recently, there have been concerns that there is a potential loophole for hackers to be able to hack Maker DAO and transfer the $300 million in ETH to their own accounts. This is because there was no delay in executive contracts which meant that any user with enough MKR could initiate an executive contract that is programmed to transfer all collateral from Maker to their account and use their MKR tokens to vote it through in the decentralized governance platform. Maker addressed this issue very quickly by initiating a proposal for the Governance Security Module which will implement a delay for executive contracts to be executed - giving time for users to flag nefarious contracts.
11. Why are Maker's MKR tokens being burned?
MKR tokens are burned constantly to provide an alignment incentive between MKR token holders and the governance of Maker DAO. As Maker DAO is a completely decentralized system, the decisions of the platform are entirely in the hands of the MKR holders. As MKR tokens are being burned, this provides an incentive for all MKR holders to make good governance decisions to keep the platform active. As more MKR is burned, this helps all MKR holders as the supply is decreased from the market.
The MKR tokens are burned from the stability fees paid by the users that take out credit on the DeFi platform. As a user opens a CDP (Vault) they will accrue interest on their outstanding loan. This interest rate is entirely the decision of the MKR holders as they put it to vote whether to raise or lower the stability fees depending on how close Dai stablecoin is to the Target Price of $1.
The Maker DAO platform automatically takes the stability fee out of the Dai repaid and uses this to purchase MKR on a decentralized exchange. This process happens continuously and autonomously anytime a CDP (Valut) debt is repaid. Once the MKR is purchased, this is automatically burned by the smart contract.
You can watch maker burn here
As of early 2020, over 10,700 MKR have already been burned with a total of $2.3 million worth of active stability fees that will eventually go toward burning more MKR.
12. What gives value to the MKR token?
The value for MKR is derived by a host of variables which include the factors of supply and demand, just like any market. As there is only a finite supply of MKR available this creates an environment where the total number of MKR is already known, leading to stability and no inflation. Furthermore, the supply of MKR is consistently dropping over time. This is due to the burning mechanism that Maker DAO employs as all of the funds taken from the stability fees of the credit issued is collected and used to buy MKR with the intent to burn them and reduce the supply.
On the demand side, the value is derived from what MKR is actually needed for. MKR is needed to pay the stability fees on the Maker DAO platform, giving a reason for users to need to buy MKR at some point in time. As the Maker DAO platform increases in the number of outstanding loans, there will be a larger demand for MKR to pay the stability fees for these loans. Furthermore, as Maker DAO is completely decentralized, all of the governance decisions are in the hands of MKR holders. If you would like to vote on what happens to the Maker platform, you will need to hold MKR.
This combination of an ever-decreasing supply and a gradual increase in demand over time helps to derive the value of the MKR token itself.
13.Where can you buy Maker’s MKR token?
Like most cryptocurrencies, MKR can be bought on a variety of exchanges that can be swapped for cryptocurrency or fiat. Typically, for the majority of exchanges, you will have to fund your account with fiat, buy BTC or ETH, and then buy MKR. Following is a list of the top exchanges to buy MKR at; (USDt = Tether and USD=Fiat)-
- BKEX - buy with ETH, BTC.
- OceanEx - buy with BTC, ETH, USDt
- WhiteBit - buy with BTC, ETH, USD
- Bitfinex - buy with BTC, ETH, USD
- HitBTC - buy with BTC, ETH, USDt
- OKEx - buy with BTC, ETH, USDt
14. What is Maker’s CDP?
Maker’s CDP is known as the Collateralized Debt Positions, which are now referred to as Vaults. The CDPs are the contracts that allow users to take out a loan by generating Dai by offering collateral to the platform.
For a user to come and take a loan out on the Maker DAO platform they have to front some type of collateral in order for the Dai (the stablecoin) to be generated. In the days when it was referred to as CDP, users were only able to deposit Ethereum as collateral. However, since Vaults have been introduced, users are now able to deposit a range of cryptocurrency as collateral including ETH, BAT, OMG, and 0x.
Once a user creates a CDP (Vault) they instantly have access to the Dai they have generated as the loan and are free to do anything they please with this cryptocurrency. For the user to be able to reclaim their collateral, they must pay back all of the Dai they have generated plus a small fee and they will be able to withdraw their collateral. After withdrawing their funds, users are then free to close the Vault entirely or open a new one to take another loan.
15. Does Maker have any private investors?
Yes, Maker has a host of private investors as they did not conduct an ICO and decided to sell all their tokens privately. This did not mean the public could not buy MKR as anybody could have bought MKR at the time of the sale by just responding to the advertisements from the Maker team.
The Maker DAO decided not to host an ICO as they were solely looking for investors who believed in the future of the project and were not interested in creating a hype machine to raise the price of MKR via an ICO.
Some notable private investors for Maker include;
- A16z & Andreessen Horowitz - Invested $15 million into MakerDAO in 2018 acquiring 6% of the total supply.
- Dragonfly Capital Partners & Paradigm - Invested around $27.5 million into MKR to help increase efforts for Dai adoption in Asia.
- Polychain - Polychain invested around $12 million into MKR very early, purchasing MKR at a great price beneath $15.
16. What is a Debt Ceiling?
The Debt Ceiling in Maker DAO is the maximum amount of Dai that can ever be issued out at any one time. This maximum debt ceiling is built into the Maker DAO platform protocol and automatically blocks people from being able to take out any extra loans until some of the outstanding loans have been repaid.
The Debt Ceiling was created as a built-in mechanism to make sure that too much debt is never issued at any one time on the Maker DAO platform and is designed to help the entire platform remain stable. The current Debt Ceiling is placed at $120,000,000 after it was increased during November 2019. The limit to the Debt Ceiling is decided upon by voters in the Maker DAO ecosystem. Users stake their MKR tokens to cast their votes on governmental proposals regarding the Maker DAO platform.
The Debt Ceiling originally started at $50 million which was then later raised to 100 million in July 2018, and then to $120 million in November 2019.
Debt Ceiling News on Nov 8, before it was raised to $120M. Source
17. What is Oasis?
Oasis is the decentralized exchange created to allow users to make on-chain trades for all token assets in the Maker ecosystem including MKR, DAI, SAI, ETH, REP, ZRX, and BAT. The platform is the central dashboard to allow users to access tools on the MakerDAO platform. It is the central hub that allows users to trade, borrow, and save.
Trading is made easy through Oasis as users can trade at the market price by placing orders in the traditional manner or make instant transactions between eligible coins in a very user-friendly manner. Oasis also allows users to borrow by depositing collateral into a vault and take out a loan in DAI, a stablecoin pegged to the US Dollar on a one-to-one ratio. Users simply connect their wallet through a 3rd part such as MetaMask, Wallet Connect, or even Coinbase Wallet. Lastly, Oasis also allows users to earn savings on their DAI by locking them up and earning according to the Dai Savings Rate, currently held at 6%.
Discover more: https://oasis.app/
18. What for MakerDAO uses oracles?
Oracles play an important role in Maker DAO as they enable the use of price data of various assets to determine functions on the Maker DAO platform such as liquidating a Collateralized Debt Position (Vault) or figuring out how much Dai can be generated during the creation of a loan.
Each collateral type has a corresponding Oracle that publishes reference prices for the system to use. The feed is generated from price data from different individuals and organizations and goes through a variety of mechanism before it is used by the Maker DAO platform. Specifically, the Oracles receive data from 20 different feeds which include 15 different individuals and 5 public organizations. By relaying the aggregate price of the reported assets and passing it through an Oracle Security Module, a mechanism that delays the publishing of new prices for a predefined set of time, the Maker DAO system has a reliable and secure Oracle that can provide consistently accurate pricing data.
Discover maker's price feeds here
19. What is Maker’s Stability Fee?
The Maker Stability Fee is the interest rate that a user will pay for borrowing the DAI in the Maker DAO platform. This Stability Fee is necessary for the entire Maker DAO platform’s function and is a crucial component in maintaining the one-to-one peg for Dai to the US Dollar.
When the price of Dai deviates away from $1, users within the Maker DAO platform can vote to change the Stability Fee in order to bring Dai back toward $1. Changing the Stability Fee changes the cost of borrowing and provides different incentives for users. For example, if more Dai loans are taken out than the market demands, the price of Dai will start to fall beneath $1.In this case, a higher Stability Fee would mean that borrowing on the Maker DAO platform would be increased and therefore fewer people would take out Dai loans - helping to stabilize the price.
The Maker Stability Fee is decided upon by the MKR holders within the community. As this is an entirely decentralized and autonomous organization, it is up to the community to decide upon this Stability Fee through a democratic vote on the Maker DAO dashboard.
Watch all stability fee stats here
20. What is DAI Savings Rate?
The DAI Savings Rate is the rate at which users will gain interest in placing their Dai into savings on the Maker DAO platform. This feature allows users to earn interest on their money simply just by holding Dai. The Dai Savings Rate is run through a special smart contract and is completely decentralized like their entire network.
Users simply have to open a Savings Contract on the platform which will send their Dai to the Savings Smart Contract which will allow them to earn additional Dai so long as their Dai remains in the Savings Rate contract. The Maker DAO platform will automatically allocate Dai to each contract equal to the Savings Rate that is dictated by the Maker DAO community through its decentralized voting process.
The owner of the Dai Savings Contract can withdraw their Dai at any time along with the savings that are automatically accrued up until the time of removal. Users are granted the confidence to know that they are always in custody of their cryptocurrency throughout the entire process as it is completely decentralized.
Must-Read piece on DAI Savings Rate
21. What are some notable MakerDAO’s partnerships and collaborations?
- Axie Infinity
- Dragonfly Capitals Partners & Paradigm
- Celer Netowrk
- Coinbase Earn
- South Korean Local Government
- Coinbase Pro
MakerDAO has many more of these, however here are the most important ones.
On May 23, 2019, Coinbase.com has announced that they will be adding the stablecoin Dai to their platform. It will enable users of the Coinbase ecosystem to buy Dai on Coinbase.com and in their Android and iOS apps. It will also allow users to sell, convert, send, receive, or store Dai across Coinbase platforms.
On June 10, 2019, Axie Infinity and Maker announced a collaboration Acie Infinity, the digital-pet universe with a player-owned economy. The two teams partnered to introduce Dai into the Acie Infinity game, granting the players a stable in-game cryptocurrency. Furthermore, for a limited time, they allowed CDP (Vault) owners to claim unique Dai-themed Rare, Epic, and Mystic NFTs (non-fungible tokens) in-game.
On June 22, 2019, MyEtherWallet enabled a facility to allow its users to be able to generate Dai straight from their interface. This makes it extremely easy for users to open a CDP (Vault) on the Maker DAO platform as it simply links their wallet straight to the platform.
On August 14, 2018, Wyre integrated Dai as a trading pair into its blockchain money transfer platform. Wyre is regulated in over 30 countries, including the USA, and now grants users to easily convert their fiat currency straight into Dai.
On December 17, 2019, OKEx announced that it has created a facility to allow its users to take advantage of the Dai Savings Rate. This will now allow its users to deposit Dai into a Dai Savings Rate contract and earn interest on their Dai, all without leaving the OKEx platform. Users can earn interest on their Dai holdings and withdraw them, with the accrued interest, at any time of their pleasing.
On December 18, 2019, Dragonfly Capitals Partners & Paradigm and the Maker Foundation announced a $27.5 million MKR sale that they had conducted. The funding was intended to support marketing efforts to bring the Maker DAO platform to China and other Asian Markets. This private sale saw Dragonfly Capitals Partners & Paradigm buying 5.5% of the total MKR supply.
On July 8, 2019, Celer Network announced the integration of Dai into the CelerX Mobile App. The integration with Maker DAO will enable CelerX users the ability to use Dai to send instant micropayments and play blockchain eSports games with zero transaction fees.
On June 10, 2019, Coinbase Earn announced a new tutorial section in which its customer base can come and learn about the Maker DAO platform and earn Dai in the process. This partnership helped its users learn how to create a loan from the Maker DAO platform, allowing them to earn up to $14.
On April 2, 2019, VANTA and HYCON (2 South Korean Local Government Projects) announced their efforts to dire awareness and adoption for Dai. Both of these projects provide APIs for the local Korean market and provide opportunities for marketing, and a portal for sending/receiving data while reducing service fees.
On April 8, 2019, Coinbase Pro integrated MKR onto their professional trading platform. This partnership now allows all of Coinbase userbase to trade MKR against BTC and their USDC coin.
Official website: https://makerdao.com/en/
Maker Tools: https://mkr.tools/
Maker Burn: https://makerburn.com/#