Maker DAO

MakerDao seek to establish a stable cryptocurrency that, by maintaining consistent value, can function as a viable medium of exchange and store of value. Maker feels this effort will encourage cryptocurrencies adoption by insulating holders from the volatility of most crypto assets. Maker intends to govern the decentralized stablecoin's operations via a Distributed Autonomous Organization (DAO).

Overview

MakerDao seek to establish a stable cryptocurrency that, by maintaining consistent value, can function as a viable medium of exchange and store of value. Maker feels this effort will encourage cryptocurrencies adoption by insulating holders from the volatility of most crypto assets. Maker intends to govern the decentralized stablecoin’s operations via a Distributed Autonomous Organization (DAO). Maker is starting with pooled Ether acting as collateral for an issued stablecoin, the Dai, which is governed and supported by a second token, the MKR, and aim to eventually move onto other forms of acceptable collateral. MKR holder’s ability to influence the governance, and particularly a set of risk parameters, of the network also makes the system potentially collectively autonomous in a way that traditional financial services organisations are not. CTO Andy Milenius worked as a software engineer for AWS prior to working on Maker via Dapphub, an R&D organization focusing on Ethereum Dapps.

Maker’s Collateralized Debt Position (CDP) smart contracts allow users to generate Dai as a result of depositing collateral, originally ETH and in the future other forms of collateral. Dai is then withdrawable, up to a limit. This collateral will be locked until the amount of Dai originally generated is repaid. CDPs are overcollateralized by at least 50% (and presently significantly more so) to mitigate the risk that the value of Dai, as pegged to the USD, comes to exceed that of its corresponding collateral in the event of a decrease in the value of the underlying collateral. Whilst this seeks to allow convertibility of one’s stablecoin back into originally agreed fiat value, and does so in an entirely on-chain manner that will appeal to many in the crypto community, the system also presents a significant cost of capital. In addition to the requirement that Dai must be repaid before collateral is available to the user again, there is a Stability Fee that must be paid. This fee is denominated in Dai and must be paid in MKR. Another key feature of the Maker platform is its ability to facilitate a decentralized margin trading platform: users can long or short ETH/Dai pairs and others as more forms of collateral are added to the network. For example, if someone cared to go long on ETH/Dai then they might do the following: deposit ETH to the Maker platform in a CDP and take the generated Dai and use this to buy more ETH. With a conviction that ETH is going to increase in value, this user has been able to effectively borrow more ETH from Maker on the condition that it will be returned (or, more precisely, the corresponding Dai will be repaid to the CDP) and requisite fees settled (in MKR). Since CDP ownership is transferable, multiple agents can be involved in Dai generation together.

Dai (ERC-20 standard) is intended to act as a decentralised stablecoin pegged to the USD, hopefully achieved via a combination of Collateralized Debt Positions (CDPs), feedback mechanisms and ‘appropriately incentivised external actors’. The other token in the Maker ecosystem is the MKR token (also ERC-20 standard), of which a finite amount, 1 million, have been created. MKR is the only acceptable token to pay ‘stability fees’ on one’s Dai, which is obtained in exchange for collateral locked away in Ethereum smart contracts. Holding MKR will also entitle individuals to voting rights on key parameters within the network, such as determining the rate that Dai’s price should be corrected, in the event of perturbation from the peg, by external actors motivated by market opportunities (market makers) called ‘Keepers’. MKR holders are provided with a strong incentive, in virtue of their being positioned as ‘buyers of last resort’, to ensure the health and success of the network. In February 2017 a $45 million development fund was announced by Maker and L4 to encourage usage of Dai.

MakerDAO is an example of a collateralised on-chain stablecoin.