E&S: MakerDAO, a locomotive for the Decentralized Finance (DeFi)

Welcome back to this second article dedicated to my new section: “Easy & Short. Cryptocurrencies made accessible ", created with the aim of introducing the reader to many tokens (often not under the spotlight) with valid projects, and facilitate their understanding with 2 articles each.

In the first article I will talk about the general characteristics of the token, while in the second article, I will go into more technical topics and we will see more peculiarities.

Have you already read the first part about MakerDAO? If you missed it, you can recover it here.

In this second article dedicated to MakerDAO I want to focus on five issues:

  • Maker Protocol and what can be expected from its future
  • Governance of the Maker Protocol
  • DAI stablecoin
  • Maker Vaults (smart contracts)
  • Price stability mechanisms

1: What is the Maker Protocol and what we can expect form its future?

We know that the Maker Protocol is among the main dApps of the Ethereum blockchain and it is the first decentralized finance (DeFi) application to register a major adoption.


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It is run by people around the world who own the governance token of the MakerDAO ecosystem, MKR. Through a system of scientific governance that includes executive voting mechanisms and polls, MKR holders manage the Maker Protocol and the financial risks of the Dai, in order to ensure its stability, transparency and efficiency.

Achieving complete decentralization and increasing adoption are key points for the future of the Maker protocol.

When we face a stable price cryptocurrency, the available market is large because it can act as an exchange vehicle for many decentralized applications. The potential market for a stablecoin like Dai goes far beyond that of the blockchain. In fact, we could exploit its use in many other sectors.

We could see it in use in the trade and daily payments sector because the attenuation of the volatility of foreign exchange and the absence of intermediaries lead to a significant reduction in transaction costs.

It would not surprise me to see it applied in the gaming industry, where game developers could integrate an entire economy into them.

Dai may also be applied to a sector that I personally care a lot: charity. Institutions could keep their accounts in a transparent and distributed way, avoiding paper accounting records which would make it easier to tamper with data.

DAI future, from these perspectives, may be really florid and various.

2: What about the Governance of the Maker Protocol?

The governance token of the Maker Protocol, allows those who hold it to vote on changes to the Maker Protocol. Note that anyone, not only MKR holders, can submit proposals for an MKR vote.

Any voter-approved modifications to the governance variables of the Protocol will likely not take effect immediately in the future; rather, they could be delayed by as much as 24 hours if voters choose to activate the Governance Security Module. The delay would give MKR holders the opportunity to protect the system, if necessary, against a malicious governance by triggering a Shutdown.

The Maker Governance process includes proposal polling and executive voting.

  • Proposal polling is conducted to establish a rough consensus of community sentiment before any Executive Votes are cast.
  • Executive voting is held to approve (or not) changes to the state of the system.

At a technical level, smart contracts manage each type of vote. A Proposal Contract is a smart contract with one or more valid governance actions programmed into it. This smart contract can only be executed one time.

3: What is Dai specifically?


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Dai is a decentralized, fair and collaterally supported stablecoin pegged to the US dollar. Dai is deposited in cryptocurrency wallets or within platforms and is supported on Ethereum and other popular blockchains.

Users can easily generate, acquire and use Dai. It is generated by depositing collateral assets in Maker Vault within the Maker protocol. In doing so, Dai enters circulation and allows users to obtain access to liquidity.

We can also get it by receiving it as a payment method, buying it from brokers or through exchanges.

This stablecoin can be used like any other cryptocurrency. We can use it for paying goods or services, we can send it to other people or keep it as savings through a feature of the Maker protocol called: Dai Savings Rate (DSR). The latter feature allows Dai holders to accrue savings automatically by locking the Dai into a DSR contract.

So, what does Dai have in common with the traditional money we use every day?

Dai was designed to perform the four main functions of money:

1) Exchange vehicle

2) Reserve of value

3) Accounting unit

4) Standard for deferred payments

4: Maker Vaults, the smart contracts of MakerDAO

All accepted collateral assets can be leveraged to generate Dai in the Maker Protocol through smart contracts called Maker Vaults. Users can access the Maker Protocol and create vaults through a number of different user interfaces.

Creating a vault is not complicated but generating Dai does create an obligation to repay the Dai, along with a stability fee, in order to withdraw the collateral leveraged and locked inside a vault.

This kind of smart contracts are inherently non-custodial, this means that users interact with vaults and the Maker Protocol directly, and each user has complete and independent control over their deposited collateral as long the value of that collateral doesn’t fall below the required minimum level.

5: How can the price of DAI stay stable to 1 USD?


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Like stablecoin, Dai has a target price used to determine the value of collateral assets Dai holders receive in the case of an emergency shutdown. The target price for Dai is 1 USD.

Yes, you are not crazy, you have just read about an “emergency shutdown”!

So, what is it?

The “emergency shutdown” have two main purposes:

  • First, it is used during emergencies as a last-resort mechanism to protect the Maker Protocol against attacks on its infrastructure and directly enforce the Dai target price. Emergencies could include malicious governance actions, hacking, security breaches, and long-term market irrationality.
  • Second, Shutdown is used to facilitate a Maker Protocol system upgrade. The Shutdown process can only be controlled by Maker Governance.

MKR voters are also able to instantly trigger an emergency shutdown by depositing MKR into the emergency shutdown module, if enough MKR voters believe it is necessary. This prevents the Governance Security Module from delaying shutdown proposals before they are executed.

The emergency shutdown is composed by three phases:

  • The Maker Protocol shuts down and Vault owners withdraw assets: this prevents further vault creation and manipulation of existing vaults and freezes the price feeds.
  • Post-emergency shutdown auction processing: collateral auctions begin and must be completed within a specific amount of time.
  • Dai holders claim their remaining collateral: at the end of the auction, Dai holders use their Dai to claim collateral directly at a fixed rate that corresponds to the calculated value of their assets based on the Dai target price.

Whit this second article on Maker we have discovered a lot of peculiarities of this big project!

MakerDAO has become the driving force of decentralized finance with one of the most established developer communities in the cryptocurrency world. Maker is demonstrating the power of the blockchain and further features of a decentralized Governance!

Do you like the Maker Protocol? Do you also have Dai in your wallet?

Keep following me to find out the next coin I'm going to analyze.

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MikeZillo Verified Member

Daily Trader, Mining Farm Project Manager, Blockchain consultant, Cryptocurrency evangelist. You can find more videos here Telegram: @mikezillo

Easy&Short. Cryptocurrencies made accessible
Easy&Short. Cryptocurrencies made accessible

In this section, we are going to create two article per each cryptocurrency/token. The first one will be technical, with a simplification of the Whitepaper and the second one will be about particulars of the coin. For example staking yields, particular functions and so on! I am sure you will like this very much!

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