Maker
MakerDAO is a decentralized organization dedicated to bringing stability to the cryptocurrency economy. The Maker Protocol employs a two-token system. The first being, Dai, a collateral-backed stablecoin that offers stability.
The Maker Foundation and the MakerDAO community believe that a decentralized stablecoin is required to have any business or individual realize the advantages of digital money.
Second, there is MKR, a governance token that is used by stakeholders to maintain the system and manage Dai. MKR token holders are the decision-makers of the Maker Protocol, supported by the larger public community and various other external parties.
Maker founders realized back in the early cripto and defi days that the ecosistem needed a Stable coin to incorage masive adoption. But Cripto assets have been very volatile, which lead to not being adopted as Money. Universally Money had 4 carateristcs
- A store of value
- A medium of exchange
- A unit of account
- A standard of deferred payment
The high volatilty did not ensure any of the existing cripto assets to be adopted as money, and this is why many teams and organizations persecute this dream
That is how Maker Dao funding team decided to creat a decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar. Dai is held in cryptocurrency wallets or within platforms, and is supported on Ethereum and other popular blockchains.
Dai is easy to generate, access, and use. Users generate Dai by depositing collateral assets into Maker Vaults within the Maker Protocol. This is how Dai is entered into circulation and how users gain access to liquidity. Others obtain Dai by buying it from brokers or exchanges, or simply by receiving it as a means of payment. Once generated, bought, or received, Dai can be used in the same manner as any other cryptocurrency: it can be sent to others, used as payments for goods and services, and even held as savings through a feature of the Maker Protocol called the Dai Savings Rate (DSR). Every Dai in circulation is directly backed by excess collateral, meaning that the value of the collateral is higher than the value of the Dai debt, and all Dai transactions are publicly viewable on the Ethereum blockchain.
Understanding Maker Ecosystem
A triangule of three main actors coexist, Maker DAO, Maker Foundation and Maker Protocol.
MakerDAO is an open-source project on the Ethereum blockchain and a Decentralized Autonomous Organization created in 2014. The project is managed by people around the world who hold its governance token, MKR. Through a system of scientific governance involving Executive Voting and Governance Polling, MKR holders manage the Maker Protocol and the financial risks of Dai to ensure its stability, transparency, and efficiency. MKR voting weight is proportional to the amount of MKR a voter stakes in the voting contract, DSChief. In other words, the more MKR tokens locked in the contract, the greater the voter’s decision-making power.
The Maker Protocol, built on the Ethereum blockchain, enables users to create currency. Current elements of the Maker Protocol are the Dai stablecoin, Maker Collateral Vaults, Oracles, and Voting. The protocol are the sum of different SmartContracts (code) that enable Maker products to run in the Block Chain
The Maker Foundation, which is part of the global Maker community, built and launched the Maker Protocol in conjunction with a number of outside partners. It is currently working with the MakerDAO community to bootstrap decentralized governance of the project and drive it toward complete decentralization.
How does it work
Dai is generated, backed, and kept stable through collateral assets that are deposited into Maker Vaults on the Maker Protocol. A collateral asset is a digital asset that MKR holders have voted to accept into the Protocol. To generate Dai, the Maker Protocol accepts as collateral any Ethereum-based asset that has been approved by MKR holders. MKR holders also must also approve specific, corresponding Risk Parameters for each accepted collateral (e.g., more stable assets might get more tolerant Risk Parameters, while more risky assets could get stricter Risk Parameters).
Maker Vaults All accepted collateral assets can be leveraged to generate Dai in the Maker Protocol through smart contracts called Maker Vaults. 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. Vaults are inherently non-custodial: 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 (the Liquidation Ratio, discussed in detail below).
Interacting with a Maker Vault
● Step 1: Create and Collateralize a Vault A user creates a Vault via Summer.fi Borrow portal, by funding it with a specific type and amount of collateral that will be used to generate Dai. Once funded, a Vault is considered collateralized. ● Step 2: Generate Dai from the Collateralized Vault The Vault owner initiates a transaction, and then confirms it in her unhosted cryptocurrency wallet in order to generate a specific amount of Dai in exchange for keeping her collateral locked in the Vault.
● Step 3: Pay Down the Debt and the Stability Fee To retrieve a portion or all of the collateral, a Vault owner must pay down or completely pay back the Dai she generated, plus the Stability Fee that continuously accrues on the Dai outstanding. The Stability Fee can only be paid in Dai.
● Step 4: Withdraw Collateral With the Dai returned and the Stability Fee paid, the Vault owner can withdraw all or some of her collateral back to her wallet. Once all Dai is completely returned and all collateral is retrieved, the Vault will burn all DAI received.
Liquidation of Risky Maker Vaults To ensure there is always enough collateral in the Maker Protocol to cover the value of all outstanding debt (the amount of Dai outstanding valued at the Target Price), any Maker Vault deemed too risky (according to parameters established by Maker Governance) is liquidated through automated Maker Protocol auctions. The Protocol makes the determination after comparing the Liquidation Ratio to the current collateral-to-debt ratio of a Vault.
For example issuing Collateral tipe ETH A you would need to collateralized at least 145% of your borrowing, and would be paying an Stability fee (interest rate) of 3,44% anual That means that if you would like to borrow 100 DAI you would need to send 145 USD of ETH at least. If ETH price drops your position would be consider as bad debt and the liquidation process would start, unless you overcollateralize your position again.
Maker Protocol Auctions The liquidation process consists of selling vault collateral for the amount of DAI required to cover the outstanding debt of this specific Maker Vault plus a liquidation fee, which is currently set at 13% for all Maker Vault types. Liquidations occur through a Dutch Auction model. When a Maker Vault is going to be liquidated and its auction has started, the auction price begins high and drops over time. For example, ETH-A auctions start 30% above the market price and drop by 1% every 90 seconds. When the auction reaches the price a bidder wants, they can bid and purchase the collateral instantly, bidder participation can yield a profit by leveraging price differences between the auction price from the Maker Protocol and the collateral price on other marketplaces. The Dai received from the Collateral Auction is used to cover the Vault’s outstanding obligations, including payment of the Liquidation Penalty fee. The Dai recieved is burn, so the system recover the good debt parameters, with all the DAI been issued against collateral.
The Maker Protocol revenue will be credited to the system surplus pool as reserves, which contains the DAI proceeds from the Collateral Auction (including liquidation penalties) as well as the Stability Fees accrued from Vaults. The pool is also the treasury of MakerDAO, and these funds will first go to the Maker Buffer and then to various scenarios to cover expenses such as MKR buyback and sustaining business operations of MakerDAO. The Maker Buffer is an independent Vault of any Maker system participants.
If the Collateral Auction does not raise enough Dai to cover the Vault’s outstanding obligation, the deficit is converted into Protocol debt. Protocol debt is covered by the Dai in the Maker Buffer. If there is not enough Dai in the Buffer, the Protocol triggers a Debt Auction. During a Debt Auction, MKR is minted by the system (increasing the amount of MKR in circulation), and then sold to bidders for Dai. Dai proceeds from the Collateral Auction go into the Maker Buffer, which serves as a buffer against an increase of MKR overall supply that could result from future uncovered Collateral Auctions and the accrual of the Dai Savings Rate If Dai proceeds from auctions and Stability Fee payments exceed the Maker Buffer limit (a number set by Maker Governance), them are sold through a Surplus Auction. During a Surplus Auction, bidders compete by bidding decreasing amounts of MKR to receive a fixed amount of Dai. Once the Surplus Auction has ended, the Maker Protocol autonomously destroys the MKR collected, thereby reducing the total MKR supply.
The MKR Token’s Role in Recapitalization In addition to its role in Maker Governance, the MKR token has a complementary role as the recapitalization resource of the Maker Protocol. If the system debt exceeds the surplus, the MKR token supply may increase through a Debt Auction (see above) to recapitalize the system. This risk inclines MKR holders to align and responsibly govern the Maker ecosystem to avoid excessive risk-taking. On the other hand if the system works correctly, more Dai would go to the surplus action and more MKR would be burn, increasing the value for the holders via scarcity.
Multicolateral Debt Positions
To issue Dai, users can choice between a wide range of Cripto Assets and Real world Assest, using them to Collateralized their positions, each asset ensure a different Colateral ratio, and Stability fee to be paid, depending on the risk parameters. The multiple colateral system helps to diversify the risk and encourage more people to onboard the protoccol.
The Key Risk Parameters for Maker Vaults are:
● Debt Ceiling: A Debt Ceiling is the maximum amount of debt that can be created by a single collateral type. Maker Governance assigns every collateral type a Debt Ceiling, which is used to ensure sufficient diversification of the Maker Protocol collateral portfolio. Once a collateral type has reached its Debt Ceiling, it becomes impossible to create more debt unless some existing users pay back all or a portion of their Vault debt.
● Stability Fee: The Stability Fee is an annual percentage yield calculated on top of how much Dai has been generated against a Vault’s collateral. The fee is paid in Dai only, and then sent into the Maker Buffer.
● Liquidation Ratio: A low Liquidation Ratio means Maker Governance expects low price volatility of the collateral; a high Liquidation Ratio means high volatility is expected.
● Liquidation Penalty: The Liquidation Penalty is a fee added to a Vault’s total outstanding generated Dai when a Liquidation occurs. The Liquidation Penalty is used to encourage Vault owners to keep appropriate collateral levels.
● Collateral Auction Duration: The maximum duration of Collateral auctions is specific to Maker Vaults. Debt and Surplus auction durations are global system parameters.
● Auction Bid Duration: Amount of time before an individual bid expires and closes the auction.
● Auction Step Size: This Risk Parameter exists to incentivize early bidders in auctions, and prevent abuse by bidding a tiny amount above an existing bid.
Real world Assets
By diversifying the collateral backing DAI and adding non-crypto related assets, it increases the DAI safety. In 2022, MakerDAO introduced RWAs as the collateral in the forms of tokenized real estate, invoices, and receivables, with a mission to combine RWAs and the Maker Protocol. MakerDAO became the first DeFi protocol to lend capital with a $100 million debt ceiling to a traditional U.S. Bank, i.e., Huntingdon Valley Bank, a Pennsylvania Chartered Bank.
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MakerDAO’s RWA Vaults have had a certain lending demand, with five Vaults currently available.
Price Stabilization mechanisms
The initial goal of DAI is to maintain a 1:1 peg to USD, but because market activities can create a certain spread, the Maker Protocol needs corresponding mechanisms to stabilize the DAI price. The Maker Protocol mainly leverages Rate Adjustment and Liquidation to implement its price stability mechanisms. Rate Adjustment includes adjustments to the Stability Rate and DSR and is conducted through governance voting; Liquidation opts for Emergency Shutdown for the exact purpose of risk control.
1) Stability Rate Adjustment: The Stability Rate is the annualized interest rate that the user has to pay when they deposit their collateral to generate DAI, which is essentially the annual interest rate of a loan. When the market price of DAI is higher than $1, the Stability Rate Feedback Mechanism lowers the Stability Rate (i.e., lowering the loan interest) to incentivize users to create Vaults and generate DAI; when the market price of DAI is lower than $1, the Stability Rate Feedback Mechanism increases the Stability Rate (i.e., increasing the loan interest) to incentivize users to close their Vaults and repay and burn DAI, thus lowering the circulating supply of DAI on the secondary market. 2) DAI Savings Rate Adjustment: The DSR allows any DAI holder to earn savings automatically and natively by locking their DAI into the DSR contract in the Maker Protocol. The DSR is a global system parameter that determines the amount that DAI holders earn on their savings over time. The DSR is paid by the Stability Rate, which means that the DSR is backed by the Stability Fee. For the Maker Protocol, if the revenue from the Stability Fees cannot cover the total expense generated by the DSR, the spread becomes a systemic bad debt that will be covered by additional issuance of MKR tokens, and as a consequence, MKR holders are the risk bearers for the spread. If the market price of DAI is above $1, MKR holders can choose to gradually decrease the DSR through voting, which will reduce demand and should reduce the market price of DAI toward the $1 Target Price. If the market price of DAI is below $1, MKR holders can choose to gradually increase the DSR, which will stimulate demand and should increase the market price of DAI toward the $1 Target Price. 3) Emergency Shutdown: Emergency Shutdown 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, thus ensuring that DAI holders can redeem their collateral. When initiated, Shutdown prevents further Vault creation and manipulation of existing Vaults and freezes the Price Feeds (See “2.5.5 Emergency Shutdown” below for detailed information.)
Peg Stability Module (PSM)
Users can deposit stablecoins accepted on the Maker Protocol such as USDC to mint DAI at a fixed rate of 1:1 with a fee of 0.1%. Deposited stablecoins will be attributed to the liquidity pool as reserves. Contrary to a Vault, MKR holders have the right to change the reserve type in the PSM to another stablecoin asset through voting. In the meantime, users can also swap DAI in their hands for USDC in the pool at a fixed rate of 1:1. The Maker Protocol currently features the DAI-USDC PSM, DAI-USDP PSM, and DAI-GUSD PSM. According to the data disclosed on the official MakerDAO website, the current circulating supply of DAI is about 4 billion, and the total amount of DAI generated through PSMs is 940 Millon, accounting for 23%
Governance
The MKR token, the governance token of the Maker Protocol, allows those who hold it to vote on changes to the Maker Protocol. The Governance Module is primarily designed to implement various risk parameters within the Maker Protocol, 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, while Executive Voting is held to approve (or not) changes to the state of the system.
The motivation of MKR holders is to maintain a secure system with low risk. Loans in Dai are the primary revenue of the protocol, collected through stability fees. As the issuing of Dai increases and more loans are given, the Maker buffer will reach its Surplus level. Through the surplus auction, MKR is purchased using Dai, and the obtained MKR is burned, reducing its supply. As there is a limited amount of MKR, its price tends to increase. On the other hand, when several vaults enter risky debt, meaning that they cannot use the value of their collateral to pay the loan plus the liquidation fee, the protocol will mint MKR, which will be sold on the market for Dai to cancel this risky debt. The increase in the supply of MKR will cause its price to decrease, affecting the holdings of all token holders. This is why the DAO aligns incentives to have a low-risk borrowing and lending system that can issue a stablecoin.
Financials
This Dune Dashboard summarizes all Maker Key stats. The track On chain makes MakerDAO a full transparent organization, whiouth being a “public Company” any user can dive into their numbers, profit and loss, monthly expenses, fees, and Collateralized assets per type.
Here are some other websites you can check out to stay informed.
Endgame (Maker Foundation dissolution)
Maker DAO started it journey with main goal of working as a DAO, but as being a early stager organization and all the frictions thata a DAO generates, they decided to delegate core decisition into the MAKER Foundation, a board team of builders, devs and people. But in last May Rune (the CEO) proposed the roadmap to become a full descentralizated DAO, this roadmap is called Endgame and it propose to solve the following problems:
The Complexity Spiral Problem: The current governance process has become increasingly complex, with over 100 MIPs, many of which are unknown, inconsistent, or abandoned. Additionally, there are numerous unwritten, implicit rules, many of which impact decision-making more than the documented ones.
Solution: Endgame introduces clear and specific rules through the Maker Constitution and Scope Frameworks. These rules aim to stabilize the governance process, make all rules explicit, and streamline or reduce them over time to make sure the focus remains on what’s critically important. The approach of explicitly documenting all rules and processes also lays the foundation for transferring most of the complexity to SubDAOs.
Voter Apathy Problem: Low voter turnout in Maker governance leads to centralization risk and vulnerability to governance attacks or forced emergency shutdowns. Typically, a few whales make key decisions.
Solution: The Sagittarius Engine (SE) Governance Participation Rewards incentivize MKR holders to easily delegate their MKR through the Easy Governance Frontend and helps increase the chance they are aligned with other MKR holders through the skin-in-the-game aspect of SE exit fees. Delegates continue to play a crucial role in Endgame, serving as stewards of most of the voting power that results from the Governance Participation Rewards. This powerful position could be dangerous to the system without proper checks and balances since delegates might wield control without accountability or skin in the game as they don’t need to hold MKR.
CVCs act as the primary check on delegates, ensuring that MKR holders have a clear line of sight and can easily comprehend all critical decisions. This is why CVCs are integral to Endgame.
The Relationship Problem Problem: The current governance system is slow and single-threaded, making it challenging for thousands of token holders to coordinate and manage delicate relationships with core unit members and collateral counterparties. Combined with the complexity spiral problem, this becomes highly problematic at scale, leading to conflicts, drama that hinders progress, and potential conflicts of interest that are difficult to detect and could in extraction of significant value from the protocol over time.
Solution: SubDAOs serve as a decentralized layer between Maker Governance and counterparties and contributors. They facilitate conflict resolution and relationship management while reducing the chance it spills over to other parts of Maker. Politics and drama can never be completely eliminated in truly decentralized DAOs, but SubDAOs that develop strong communities and counterparty networks can grow and execute without being slowed down by distractions from potentially dysfunctional relationships in other SubDAOs, and eventually those SubDAOs can then either be fixed or simply replaced by new SubDAOs that start fresh.
Growth Additionally, a last problem is that the Dai supply isn’t growing and we don’t have effective means of distributing Dai or attracting more users. The SubDAOs in particular will help with this significantly because they can execute on growth strategies in parallel, and can use unique branding to specialize in attracting specific demographics, instead of being forced to try to make one-size-fits all distribution strategies. Then there’s also the SubDAO token farming element, where users may be attracted to use Dai and participating in the Maker Ecosystem because they can get SubDAO tokens for free through a fun and user-friendly gamified experience.
Conclusion
Maker Protocol has emerged as one of the most innovative decentralized finance platforms, offering users the ability to generate Dai, a stablecoin pegged to the US dollar, by leveraging their collateral assets through Maker Vaults. The Protocol’s governance system allows MKR holders to vote on risk parameters and changes to the system, ensuring that the network remains decentralized and responsive to the needs of its users.
One of the key strengths of the Maker Protocol is its ability to diversify its collateral portfolio, which helps to ensure the stability and reliability of Dai. The introduction of real-world assets as collateral and the PSM mechanism has further enhanced the Protocol’s ability to maintain a stable peg for Dai. However, there are still risks involved, such as the potential for Dai to become undercollateralized, which could lead to significant loss for users. Additionally, the risk of liquidation in Maker Vaults poses a potential threat to the stability of the network, and the complexity of the governance process could make it difficult to achieve consensus on important decisions.
Despite these risks, the Maker Protocol represents an important innovation in the world of decentralized finance, and its continued development and expansion will be worth watching in the coming years. As the platform continues to attract new users and expand its capabilities, it has the potential to become a major player in the global financial system, offering a decentralized and transparent alternative to traditional finance. With its commitment to decentralization and its focus on developing innovative solutions to complex financial problems, the Maker Protocol is poised to play an increasingly important role in shaping the future of finance.
Recompiled and written by Manu
