Using crypto to borrow crypto was once a dilemma. Since most crypto assets are highly volatile, the amount someone has borrowed in crypto and the amount they have to pay back can vary widely over a short period of time. And MakerDAO appeared. By combining loans with a stable currency, MakerDAO allows anyone to borrow money and reliably predict how much they will have to pay back.
Below we will clarify how the MakerDAO protocol manages to attract more than 2% of the total ETH supply by allowing you to borrow money for yourself.
What is MakerDAO?
MakerDAO is an organization that develops lending, savings and stable cryptocurrency technology on the Ethereum blockchain. It created a protocol that allows anyone with ETH and a MetaMask wallet to borrow money in the form of a stablecoin called DAI. By locking some ETH in MakerDAO smart contracts, users can generate a certain amount of bundled DAI. As more ETH is locked, more DAI can be generated. When users are ready to unlock ETH, it acts as collateral for DAI loans, which they then simply pay back with a fee.
MakerDAO created a core layer of the decentralized financial system on Ethereum, now known as “DeFi”.
Who invented MakerDAO?
Rune Christensen is the founder and current CEO of MakerDAO.
What’s special about it?
People have to be honest on their own with no credit checks, so how does borrowing even work on blockchain? The answer is liquidation, that is, the moment when an asset is converted into capital to pay off creditors.
When the loan collateral falls below a certain point, meaning the price of ETH has fallen too low for the borrowed amount of DAI, the loan will be liquidated. In other words, collateral in ETH will be sold off to pay back the borrowed DAI plus penalties and fees. Liquidation and liquidation threats keep the system stable by preventing people from borrowing too much.
What else is different?
If the threat of liquidation keeps the system honest, then the Maker token (MKR) holders will be the lenders of last resort. When the price of ETH crashes and too many loans are liquidated at once, MKR is created and sold off to pay back the loans. At the same time, fees must be paid in MKR and liquidation penalty to be used to redeem MKR, burn or destroy. In theory, there should always be enough value in MKR to back up liquidated loans.
DAI, ETH, and MKR work together as an automated check and balance system. Each function neutralizes the other, keeping the system stable and decentralized.
Here’s a quick rundown of how all three work:
- DAI is an ERC20 token on the Ethereum blockchain with stable value, valued at one US dollar. It is also the key to the MakerDAO lending system. When the loan is launched on MakerDAO, DAI is generated. It is the currency that users borrow and repay.
- The Maker Token (MKR) was created by MakerDAO and its main purpose is to support the stability of the DAI token, and to enable governance for the Dai Credit System. MKR holders make important decisions about the operation and future of the system.
How are MKR tokens generated?
MKR is an ERC20 token that is created or burned depending on how close the stablecoin DAI is to the US dollar. The creation of new MKR depends on the stability of DAI. If DAI remains stable, more MKR will be burned reducing the total supply. If DAI fluctuates too far from the one dollar level, more MKR will be created, increasing the total supply.
How to hold MKR . tokens
MKR is available on major exchanges like OKEx and decentralized exchanges like Kyber Network.
What can you do with MKR?
As MKR holders benefit financially from MakerDAO’s stable system, they are incentivized to act in the best interest of the MakerDAO protocol. As a result, MKR holders can vote on governance decisions like setting high fees and what types of collateral can be accepted as collateral by the protocol. In the MakerDAO system, one MKR token equals one vote so that every person or organization holding a large amount of MKR can have a big influence on the outcome of the vote.
Toward the future
MakerDAO has become one of the flagship projects of the DeFi movement thanks to a series of high-profile partnerships that have helped drive widespread adoption.
Dislaimer: This information is provided as a personal blog, not general information or investment advice. We are not responsible for your investment decisions.
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