It truly does still amaze me at how undervalued MakerDAO has managed to remain after all this time. I mean, it is doing alright as it manages to hold a top 25 ranking at the 23rd position - holding nicely at a price of around $585. However, the price for the coin has been trapped at the $800 resistance level for far too long now and it should only be a small matter of time before this resistance is breached.
I suppose the main reason as to why MarkerDAO is still very undervalued is the sheer complex infrastructure around the 2-tiered cryptocurrency lending platform. It is very very complicated at first and requires a few run-throughs to understand it all.
When understanding MakerDOA, an investor will need to have a grasp of concepts such as Collateralized Debt Positions, liquidity ratios, smart contracts, stablecoins and the overall Ethereum blockchain to even gain some form of comprehension…with this in mind, it is no wonder that MakerDAO has remained pretty stagnant this past year or so (in both price and adoption).
So let me try and do my part to try and explain this whole concept as well as I possibly can and hopefully someone will see this post and really see the brightness surrounding the possibilities of MKR, DAI and the entire Decentralized Autonomous Organization behind Maker.
Dai - A Stable Coin Minted By The People
The whole idea of the MakerDAO platform is for users to come on board and be able to take out collateralized loans in the form of the stablecoin Dai. Through a variety of mechanisms, Dai is pegged to the US dollar and is considered to be a stable coin that can be traded on any exchange (pretty much like Tether if you know of it).
The entire system is built using Smart Contracts that are run on the Ethereum blockchain. The entire MakerDAO system, including MKR, Dai and the smart contract interface, is a locally closed system that runs on top of the Ethereum Virtual Machine (EVM) and thus employs the Ethereum blockchain instead of its own.
So Dai is the stable coin in this whole system, it is minted by users when they lock up crypto collateral (Ethereum) on the platform in the form of a Collateralized Debt Position (CDP). Dai has to be returned by the user in order to close the CDP.
MKR is the token that allows users to vote on governance settings and proposals. To have a say in the entire MakerDAO system, a user must have MKR to participate. Furthermore, MKR is required to close CDPs and are burned in the process - effectively removing them entirely from the supply.
The thing that most people become confused about is how the supply and stabilization of Dai is left entirely to third parties. This is because they are free to lock their collateral in the smart contract as they please, effectively minting new Dai. This basically means that the entire supply of Dai on the market is the sum of all of the current open CDP smart contract positions.
So How Do CDPs Actually Work?
The smart contract program that allows users to create the CDP is the main product from the MakerDAO team. It is these smart contracts that allow Dai to be minted by the user as they ensure that the minimum level of collateral is met before minting Dai.
Basically, a user can come along and lock away a set amount of Ethereum on the MakerDAO platform. The platform will provide a liquidation ratio that will tell the user the maximum amount of Dai they can create for every dollar of collateral given to the smart contract. As cryptocurrency prices are very volatile, users will typically overcollateralize their positions. This basically means that they would put in a minimum of 150% of the loan in collateral to help circumvent the volatile price movements. If the price of Ethereum drops, the user must add some more Ethereum into the smart contract to prevent the contract from liquidating. If the price for Etheruem goes up, the user can just mint some new Dai if they please.
This over-collateralization is the main reason that all of Dai on the market are currently backed by 393% of Ethereum - meaning all the loans are heavily overcollateralized. There are currently 1.3 million Ethereum locked up that are acting as collateral for the 78.7 million Dai out there. This is almost 1.3% of all Etheruem in circulation which is pretty damn crazy!
Closing the CDP
To close the CDP the user must return all of Dai borrowed plus a small settlement governance fee in the form of a given annual percentage, currently at 0.5%. The settlement fee is to be paid in MKR which are in turn sent to a burn address and removed from the system.
This act of burning MKR to close CDP is what will help MKR to reach fresh new heights over the long term period, especially considering that there are only 1 million MKR coins in total supply.
So Why Will MakerDAO Get Really Big?
As time draws on and more people start to realize the possibilities given by the MakerDAO platform, they will be instantly drawn to its features. This is because they will finally have another option to gain liquidity from their cryptocurrency without selling them. Users now have the choice to take out loans backed by cryptocurrency instead of needing to go and sell them on exchanges and having to pay added taxes.
This effectively turns MakerDAO into somewhat of a decentralized bank, allowing users to come and receive loans as they please, whilst maintaining their privacy and security. As decentralized finance continues to gain traction within the entire world, with apps such as Revolut providing finance to users without bank accounts, we can surely expect this to flow over in the cryptocurrency space at a much faster rate.
Taking a look at the long term weekly chart above for MKR/USD we can clearly see the well defined range between $800 and $300 that the market has been trading within for the past 12 months or so. Each time MKR/USD attempts to break above $800, it meets the resistance and rolls over.
However, once the $800 resistance level is broken, we truly start to see the potential increases that MKR can deliver over the long term. The cryptocurrency has already been as high as $1,700 and most certainly has the potential to continue to climb much further higher if the MakerDAO system contains to gain traction as it has been.
Currently, there are around 3000 CDPs open and we expect this number to continue to rise as the system gains more and more traction during the next few months.
Hopefully, this post has helped at least one person to understand the actual potential of the entire MakerDAO system. I think it is on us to try and help spread the word on what MakerDAO actually does and its differences from typical untransparent stable coins available today. If MakeDAO continues to grow over the years and eventually Dai gets added to the largest exchanges, it will truly develop into one of cryptocurrencies powerhouses as it becomes a central hub in the world of decentralized finance.