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Maker is a smart contract lending platform that allows users to take out over-collateralized loans by locking-in collateral like Ether in exchange for Dai, a stablecoin pegged to the U.S. dollar. Once generated, Dai can be used as an hedge against volatility, a tool to get leverage on your collateral, or get yield through decentralized finance (DeFi) applications. The platform has enjoyed widespread adoption and is among the largest decentralized lending platform with around $14.12 billion in total value locked (TVL), as of April 2022.


Founded in 2014 by Rune Christen, the earliest prototype of the Dai stablecoin was announced in a Reddit post dating back to March 2015. In December 2017, the first formal white paper was published about MakerDAO, introducing theMaker governance token (MKR) and its first stablecoin known as Single Collateral Dai (SAI).

The white paper described how anyone could generate Dai using Maker by leveraging Ethereum (ETH) as collateral through unique smart contracts known as Collateralized Debt Positions (CDPs). Given that ETH was the only collateral asset accepted by the system, the Dai generated was called Single-Collateral Dai (SCD), or Sai. The white paper also included a plan to upgrade the system to support multiple collateral asset types in addition to ETH. This upgrade was subsequently executed in November 2019.

The Dai Stablecoin System, today called the Maker Protocol, now accepts as collateral any Ethereum-based asset that has been approved by MKR holders, who also vote on corresponding Risk Parameters for each collateral asset. Voting is a critical component of the Maker decentralized governance process.

The Dai Stablecoin

The Dai Stablecoin

The Dai stablecoin is a decentralized, collateral-backed cryptocurrency soft-pegged to the US Dollar. Dai is created when users borrow against locked collateral, and it is destroyed when loans are repaid. If you deposit Ether or other cryptocurrencies accepted as collateral, you will create a new Dai. When you pay back the borrowed Dai, the locked collateral will be recovered. [1]

Users generate Dai by depositing collateral assets into Maker Vaults within the Maker Protocol. To reduce volatility risk, crypto-backed stablecoins like Dai are usually over-collateralized. This meant that instead of a 1:1 ratio backing, the ratio could be 1:2. Currently you could mint Dai for the value of up to 70% of your ETH. [2]

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.

Collateral Assets

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 must also approve specific, corresponding Risk Parameters for each accepted collateral (e.g., more stable assets might get more lenient Risk Parameters, while more risky assets could get stricter Risk Parameters). Detailed information on Risk Parameters is below. These and other decisions of MKR holders are made through the Maker decentralized governance process.[3]

The USDC problem

In March 2020 the stability of Dai was questioned during extreme market volatility, to mitigate liquidity risk there was a proposal drafted to onboard USDC as collateral. USDC is a stablecoin backed by dollars held in a bank account, and supported by several institutions including Coinbase and Circle. However critiques have questioned adding USDC as collateral as it would make Dai less decentralized with banks backing the Dai stablecoin.[4]

With the proposal to add USDC it opened the way for more fiat-backed stablecoins to be added. In July 2020, an upgrade to the Compound lending protocol caused Dai to come of its peg again. This was already anticipated but resulted in a proposal to add other stablecoins like Gemini USD, Binance USD and increase the systems debt ceiling.

This development made the backing of Dai partially dependent on centralized actors thus making Dai less decentralized.

Dai usecases

  • Dai is a great medium of exchange due to its stable value and being soft pegged to the U.S. dollar.
  • Users can use Dai to earn income on their ETH by minting Dai using their ETH and then depositing that Dai in some DeFi app to earn yield.
  • Dai can be minted to get a leverage position on your collateral by depositing collateral, minting Dai and selling Dai to purchase more of the collateral.
  • Dai can be used to avoid taxes by borrowing against collateral instead of selling it.

The Maker Protocol

The Maker Protocol

The Maker Protocol is one of the largest DApps on the Ethereum blockchain. Designed by a group of contributors, including developers within the Maker Foundation, its outside partners, and other persons and entities, it is the first decentralized finance (DeFi) application to see significant adoption.

The Maker Protocol 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 govern the Protocol and the financial risks of Dai to ensure its stability, transparency, and efficiency. One MKR token locked in a voting contract equals one vote.

What is the Maker token (MKR)?

The Maker token has two core functions: i) governance and ii) recapitalization. In terms of governance, MKR token holders are responsible for monitoring, participating, and voting on proposals or changes to ensure the overall health of the Maker protocol. This is done via two types of polls which are executed through smart contracts: i) proposal polling and ii) executive polling.

The former is used to gauge the consensus of the Maker community towards a proposed change. It is a preliminary step, conducted to ensure that proposals are well thought out before formal voting begins in executive polling. In that stage, MKR holders officially vote to approve or disapprove a proposal. The smart contract address which receives the highest number of MKR tokens is then elected as the active proposal. Further details on polls can be found in Maker’s whitepaper.

Some examples of changes that have been proposed or implemented in the protocol are: adding a new collateral asset, modifying the Dai Savings Rate (DSR), choosing a set of oracle feeds and upgrading the Maker contract’s functionality. Users can view all current and previous polls, as well as their outcomes, on Maker’s governance page.  

The second function of the MKR token is recapitalization. In the event that system debt exceeds surplus, additional MKR tokens are minted by the protocol and sold for Dai through debt auctions to help bring the ecosystem back from insolvency.

On the other hand, if system surplus exceeds debt, the protocol sells Dai via a surplus auction for MKR, which is subsequently burned. This mechanism incentivizes MKR holders to keep the system running as intended; bad governance will result in MKR value dilution and vice versa. More information on recapitalization can be found in Maker DAO’s community development page, while auctions are elaborated on here.