Beginner’s Guide to MakerDAO – Resolving the Fight Against Volatility

Beginner’s Guide / 01.04.2020

The DeFi Ecosystem

Decentralized Finance, or more commonly known as DeFi, is the newest trend in the cryptocurrency sector. After “Colored Coins”, Smart Contracts and ICOs, DeFi has taken the limelight. It has opened a door to a whole new branch of decentralized technologies.

Among the several hundreds of projects that focus on bringing Decentralize Finance to the masses, none has been as successful as the MakerDAO Network.

The Need for MakerDAO

The MakerDAO is a decentralized smart contract platform on Ethereum. It is one of the most diversified and community driven DeFi projects in the market. One of the main functions of the DAO (Decentralized Autonomous Organization) is to back and stabilize the value of its native token – DAI. The network uses a dynamic system of Collateralized Debt Positions (CDPs), autonomous feedback mechanisms, and appropriately incentivized external actors to maintain liquidity.

Essentially, Maker is a stablecoin platform that carries several other features under its hat. Maker enables anyone to leverage their crypto assets to generate DAI on the Maker Platform. The leverage can be used in a myriad of ways, such as getting loans, issuing governance rights, building applications based on stable coins and so on.

Once generated, DAI can be used in the same manner as any other cryptocurrency. DAI can be freely sent to others, used as payments for goods and services, or held as long-term savings. Importantly, the generation of Dai also creates the components needed for a robust decentralized margin trading platform. DAI, using USD as a hedge, is relatively stable when compared to the crypto market.

With the DeFi Ecosystem on the move, Maker aims to prove itself as the major player in providing finance products on the Blockchain. Since 2016, Maker has been in constant development, starting from the alpha test – SAI, and eventually moving on to the full-fledged DAI and then on to other DeFi products. The projects started with a plan to help bring collateralized loans on the Ethereum Blockchain, but since then has gone on to issue several finance-based products such as Governance protocols, decentralized exchanges, token management and so on. The MakerDAO has currently cemented its position as the main player in the decentralized financial products market.

Characteristics of the MakerDAO

According to the White paper, “The founders of the Maker community have established a prudent governance roadmap that is appropriate for the needs of agile development in the short term, but also coherent with the ideals of decentralization over time.” For this reason, it is important to point out the characteristics of the Maker Network so that we can look into its use cases later.

Maker Tokens

maker tokens available

Tokenization is the process of substituting a tangible or non-tangible asset with a digital equivalent, for identity, transfer and storage purposes. Tokenization has increasingly become the greatest craze in the Blockchain industry. To help their users with easily navigating the platform, Maker has come out with three individual tokens:

  • MKR – The native token of the Maker platform. The Maker community exists partly to act as the decentralized counterparty to the Maker Team. It is a loose collective of independent actors who are all aligned by holding the MKR token, giving them a strong incentive to see the Maker Platform succeed.
  • DAI – The DAI Stablecoin System was designed to solve the crucial problem of stable exchange of value in the Ethereum ecosystem and the wider blockchain economy.
  • SAI – SAI is the experimental branch of the platform. People who wish to interact with the network and prospectively build applications on it can make use of the sad network. SAI is the stable coin used to test features and do beta tests.

DeFi Products

Governance

Governance based applications can be developed on the network. It is done at the system level through the election of an Active Proposal by MKR voters or tokens issued using the Maker platform.

Migrate

It can be used to help tokenized SAI migrate to the in-house Maker network. The Maker network is then used to build applications that can do well in a platform centered on stability.

Oasis

Oasis is a loose decentralized exchange. We use the word ‘loose’ because there are no fixed features for the Oasis platform. Users can use Oasis to trade, save, leverage, or even borrow.

Ecosystem

Apps that use Maker to run and function come under the Ecosystem. Over the years, dozens of applications, even highly successful ones, have come to use the Maker Platform. The OKEx, Argent, InstaDapp are just some of the dozens of applications using Maker.

Global Settlement

The Global Settlement feature is built as a last resort. The feature could be initiated by the stakeholders of the MKR token anytime they feel that the network is under threat and it is necessary to safeguard the funds of the holders and users of DAI. An emergency such as network hacks, market irrationality, security breach, etc. can trigger the network to immediately settle the balances and return the funds to the users.

What Can You Do with MakerDAO? – Use Cases

CDPs

Anyone who has collateral assets can leverage them to generate DAI on the Maker Platform through Maker’s unique smart contracts known as Collateralized Debt Positions. Currently, a user wishing to open a CDP must indeed over-collateralize by 150%. This means that for every $150 of ether deposited as collateral, $100 worth of Dai can be minted. This collateral margin is designed to protect Dai holders against a negative equity scenario. Active CDPs are always collateralized in excess, meaning that the value of the collateral is higher than the value of the debt.

Multi-Collateral Loans

In 2017, when the beta test of DAI released, the projects only supported collateralized loans in Ethereum, as it was essentially built on the Ethereum chain. The network then went on to accept more than half a dozen tokens and diversified its services. Users can use leverage to make loans and fund their daily activities.

Financial Products Platform

As of early 2020, about 50% of the entire DeFi funds are associated with Maker. Maker is in some ways considered the Bitcoin if the DeFi platform – the lone dominator. Dozens of applications have fond their home in the Maker Network. Some of the projects, Insta DApp – which is a leverage and loans platform, Argent – that acts as a public key compiler, OKex – which is a decentralized exchange built on Marker, can help revolutionize the world of Finance as we know it.

Resources:

MakerDAO | Whitepaper | GitHub | Maker Oasis |

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Sudarshan M is a long time crypto-enthusiast. Pulled in by bitcoin early on, it did not take long for Sudarshan to divert all of his academic attention from business studies to blockchain by doing his Masters and eventually pursuing his PhD in the subject.