Working of MakerDAO explained and Take Loans

Taking loans with MakerDAO explained and Use cases of MKR token. Mint DAI stable coin.

By cybercrypto | YourFinonymous | 20 Jan 2022


     

Maker DAO thumb.png

There are some CryptoCurrencies or tokens of various blockchains that are operated by Organisations. These are not normal organizations and are totally Decentralised means No single person has authority over the company/organization.

Organization Like this are called DAO (Decentralised Autonomous Organisation) as the name suggests these are not controlled by any central authority. No single entity has power over it and everything is operated by and programmed by smart contracts.
With Smart Contracts, no one can change or edit the rules and conditions decided by the members of DAO once it is deployed.

To read more about DAO refer to this article :

https://read.cash/@CyberCrypto/working-and-investing-in-dao-explained-f7b9375b

One of the earlier DAO and most famous DAO is MakerDAO

MakerDAO


MakerDAO is a Decentralised Autonomous Organisation that runs a protocol on the Ethereum Network where it allows us to borrow assets in exchange for some collateral.

 

It is a borrowing and lending platform which gives out loans with some interest to it.

It has its own tokens called DAI and MKR

DAI Token

image.png

Source : https://makerdao.com/en/
It is the Stablecoin of MakerDAO with the value 1$. The ratio always will 1:1 with USD. It is an ERC 20 token that can be used the same as other cryptocurrencies.

Keeping the coin stable to 1$ makes it easier to store, accept and handle for other organizations. Storing and accepting stable coins eliminates the market volatility hence making investment less risky and funds held safe.

MKR Token


MKR token is the governing token of the MAKER protocol. This means holding the MKR token will allow its holder to take the decision of the MakerDAO.
The holders of makerDAO are able to vote for any proposals, choose what will be the stability fees, the interest rates, and various things.

Working of MakerDAO

Basically, to borrow a loan you have to give keep some collateral in DAO.

In Maker Protocol, you have to deposit Ether or any ERC-20 as collateral against the DAI stable coin you are going to get.

This is the loan MakerDAO is giving to us against our assets which creates CDP { Collateralized Debt Position }

When you Deposit Ethereum in Maker Protocol smart contract CDP is created. After that, you are able to mint the Dai coins.

You are only able to mint Dai 2/3 of the total value of Ether locked in. That means the collateral should be 150% or more to mint the required DAI.

As far now I see to borrow a loan the minimum Coll. ratio is 145% and It has a stability fee which we are required to pay back in MKR. The stability fee is 2.75%

To avoid the risk of market volatility these steps are taken. If the value of Ether falls less than DAI then the CDP is closed and we get the penalty.
Another person has to liquidate our vault which makes a huge loss for us.

Therefore to avoid under collateral always take less DAI or keep more ether in CDP to avoid any market volatility.

After the required time to get back our assets we are required to pay back the DAI with stability fee which is then burned. And our Ether is unlocked.

This burning of DAI and MKR keeps the Dai coin stable, and the stability fees are accordingly adjusted to increase or decrease the creation of new DAI to keep up demand and supply.

 

Use Cases of DAI coin after taking a loan: -


When you get the loan from Maker, you can use it as you use any other crypto's. You can trade with them, earn take profits.
Some platforms also allow you to stake or add coins in Liquidity pools where you can get a good APR.
Just make sure you invest in pools where you get interest more than the stability fees while repayment of the loans.

 

Use Case of MKR Token.


This token is mainly used to govern the MakerDAO. For every decision about the Stability Fee, Collateral Percentage and borrowing assets, etc MKR holders have the power to decide.
In case of any unstable in the crypto market and the value of DAI decrease due to less collateral available more MKR is minted and Sold to keep the coin stable

 

Final Words-

MakerDAO is one of the oldest and the biggest DAO which operates fantastically, It is one of the most successful DAO.
Other stable coins use collateral like Physical assets and Fiat money and are not totally decentralized. But with help of smart contracts, MakerDAO is totally Decentralised. which makes it good for the Holders.

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cybercrypto
cybercrypto

Crypto Enthusiast | Blogger | Cook | Philosopher |


YourFinonymous
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