Maker is a name that crypto beginners and blockchain enthusiasts will see mentioned frequently on message boards and the trader community. However, understanding Maker and stablecoin DAI is a bit tricky, as the technology itself has many layers of undeniably depth and complexity. Maker is currently one of the best financial applications of decentralized blockchain on the market, so it’s important to get a better understanding, regardless of your role in the crypto market. .
What is Maker?
Maker is the name of a single blockchain project that has many facets, including two cryptocurrencies, a smart contract, and an ecosystem tied to the Ethereum blockchain. The first and foremost thing to understand about Maker is its financial nature and the entire carefully balanced functionality it was designed for with one purpose in mind: to merge the idea of leverage from a centralized market to a decentralized one. central.
DAI is what
The first component of Maker is the stablecoin DAI. DAI is a blockchain cryptocurrency like Ethereum or Bitcoin, but it has no volatility against the dollar. Like Tether, TrueUSD, USDC, or any other dollar-pegged stablecoin, the value of 1 DAI is always equal to $1. However, it is not because every DAI is backed by a physical dollar in some remote bank account as a decentralized idea, the value of DAI has been backed by ETH and managed by a smart contract called CDP.
What is a Mortgage Debt Position?
MakerDAO Collateralized Debt Position (CDP) is a loan managed by a smart contract system running on the Ethereum blockchain. The CDP is a key element of the Dai Stablecoin system, supporting the creation of Dai by holding the user’s collateral until the Dai is repaid.
The use of CDP will change the total supply of Dai. Users create Dai by mortgaging their assets and destroy Dai when they pay off their debt. This process takes place on the chain and it allows to check all the amount of Dai in circulation and other collateral.
CDP requires excess collateral. The value of collateral in a CDP is required to be higher than the amount owed to assure Dai users that their Dai is always valuable and fully backed by real assets.
What is CDP?
CDP – This is the second module of Marker and stands for Collateralized Debt Position (mortgaged debt position). A CDP is a smart contract that stores ETH and issues DAI stablecoins on the blockchain, with ETH used as collateral. It is like a loan from a bank using physical assets as collateral.
What is Marker Coin (MKR) ?
The final component is the Makercoin (MKR) cryptocurrency. MKR token holders are responsible for maintaining network integrity, managing CDP collateral, and ensuring consistent governance. This position of responsibility means that MKR holders are rewarded with fees, but they are also the last line of defense should a black swan event occur that upsets Maker’s delicate balance.
How does Maker work?
Maker’s goal is to enable crypto holders to leverage their assets and increase market exposure if they so desire. One can easily deposit their ETH in CDP and use the DAI given to them to buy more ETH for example. Even so, there are questions about the stability of DAI, without the backing of a physical dollar, how will the coin react to unusual movements in crypto trends, and the big role it plays. than of Makercoin in the system.
Even without material support, DAI still has no money. When someone sends their ETH to the CDP, it is locked and is no longer theirs until they send the same amount of DAI it issued. The amount of DAI you can generate with ETH is always changing, which counteracts volatility in ETH itself. For instance, one day you can send 1 ETH and receive 69 DAI, while the same amount of ETH can generate 96 DAI a day later. You will only get this ETH back if you deposit 66 or 96 DAI to the CDP. This is called the collateral ratio, and it is one of the basic elements of a CDP smart contract. It is also voted periodically by MKR holders, which is an important part of their job.
Moreover, it is not always exactly $1. On some days it goes as low as $0.98 and others as high as $1.02. It may not seem like a wide range, but even a few pips down in dollar value can create chaos. In response to the inevitable reality of DAI being worth more than $1, Maker has an algorithm that adjusts fees and collateral rates (independent of MKR holders) that help generate DAI with ETH in more beneficial. However, an increase in the price of ETH is merely an increase in DAI collateral and does not lead to real problems other than the need to adjust the collateral rate.
What if all are down?
If DAI is worth less than $1, it’s a bit more of a hassle. This could happen if ETH drops in price quickly, thus also dragging down the price of DAI. If such an event persists without being resolved, the system will crash. In the event that ETH and DAI prices drop, the Maker system will automatically liquidate CDPs before the amount of ETH inside them drops below the value of the DAI they generate. This is the risk of leverage. The Maker website even has a handy dashboard that lists all active CDPs and their personal IDs and values, and when the market crashes (as it tends to recently), it is an important source of knowledge.
While these keep DAI collateralized, the crypto market looks much different during bear markets than during black swan events. This is where MKR holders come in. They incentivize by fees, but Maker’s ultimate emergency function is that if the whole system goes up, Makercoin is liquidated along with ETH in each CDP. This is why the value of MKR is so high (about $700 per coin at the time of writing). It presents a lucrative opportunity to take control of a revolutionary decentralized finance idea, but also involves personal financial risk.
Current MKR price list
Why do we need Maker?
Maker versions of fully decentralized stablecoins are crucial for the next generation of transaction ideas built on the blockchain. Lending platforms, betting sites and even money transfer apps are not subject to any volatility, or other significant risks introduced. Imagine sending money to a friend abroad and seeing the value fluctuate 20% before it arrives.
Decentralized value transfer projects can also offer their clients maximum security, and without a bank or other authority to guarantee their refund, a new solution is needed. . Relying on the legal system to ensure that token holders are reimbursed in the event of fraud is unsustainable, as a dollar-backed stablecoin is essentially a certificate that shows you owed $1, but only through the traditional legal system can you get a refund. With Maker, this idea is revolutionized and there are no middlemen, a characteristic of decentralization.
For all the new functionality it brings to the nascent crypto market, Maker can be commended for its somewhat convoluted design. Cryptocurrency traders of all experience levels need to get acquainted with Maker as soon as possible, in preparation for the highly independent and impressive crypto finance sector that Maker has opened up.
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