The banking industry has always been the single institution in charge of lending and borrowing. They often charge high fees for giving out loans and compel users to undergo strict loan application processes to access loans.
Decentralized Finance (DeFi), an industry now worth $236 billion, exists to challenge traditional banking by removing the unnecessary middleman services provided by many banks.
One of the most successful projects to emerge from DeFi to date is Maker, a decentralized lending and borrowing platform that now dominates the space.
In this article, you will learn about Maker, how it works and the various use cases of its token, $MKR.
What is MakerDAO?
Maker is an Ethereum-based platform that allows users to borrow DAI, a token that is directly worth the value of the U.S dollar. In other words, one Dai is worth about 1 dollar.
MakerDAO isn’t governed by a single entity. Instead, it is governed by participants who hold the governance token (MKR), This is where the DAO (decentralized autonomous organization) part of the name comes from.
IMakerDAO was established in 2014 by Rune Christensen. It is the longest-running project on Ethereum’s blockchain.
Initially, the Maker team held 1 million MKR tokens, which were distributed between MakerDAO developers, private sale investors, and the fund. Part of the supply is being traded at exchanges.
A large amount of MKR is controlled by Dai foundation, which plans to spend a great percentage of the supply on the platform development, funding of the decentralization application, and infrastructure, and collaborating with strategic partners.
The Maker Protocol has always been focused on unlocking the possibilities of decentralized finance and providing developers and users with new, and easier financial tools. Hence, the Maker Protocol created a system that makes accessing financial services available to anyone connected to the Internet.
Maker Use Case: Voting in MakerDAO’s Ecosystem
On Maker, users who hold MKR can control the fundamental parameters of the ecosystem, including stability fees, interest rates, collateral assets, among others
Holding MKR tokens gives users voting rights within Maker’s continuous voting system. The voting is done via a procedure called continuous approval voting.
In continuous approval voting, every MKR holder can use their tokens to vote for or against any submitted proposals in the ecosystem.
Any MKR holder can submit their proposal to the network and proposals with the most votes become the “top proposals” which are then implemented immediately.
The structure of all this is done democratically so that each change proposal must have the vote of the majority of MKR token holders. This prevents the protocol from falling into the hands of a few bad actors.
Proposals that MKR holders can vote on include the following; Adding a new collateral asset type with a unique set of Risk Parameters, choosing the set of Oracle Feeds, choosing the set of Emergency Oracles, Upgrading the system, and many more.
Like similar projects, bad governance reduces the value of $MKR, so MKR holders are incentivized to participate and vote actively for the network’s good.
Maker Use Case: Issuing DAI and Regulating its Price
Maker is a protocol that allows MKR holders, who have ETH and a MetaMask wallet, to lend themselves money in the form of DAI. DAI is issued when an MKR holder deposits some ETH in a smart contract called collateralized debt positions (CDPs).
CDPs act as loan agreements between a borrower and the MakerDAO protocol. When the borrowed DAI has been repaid, the CDP automatically returns the ETH to users.
Apart from issuing DAI tokens, MKR holders can also manage and stabilize DAI’s price. This is done by triggering what is known as an Emergency Shutdown.
Emergency Shutdown is triggered in the event of a system upgrade or serious emergencies, such as long-term market fluctuations, a hack, or a security breach.
The emergency shutdown is used as a last resort to protect the Maker Network against such hacks while maintaining Dai’s ideal/target price.
When triggered by MKR holders, Emergency Shutdown stops and shuts down the Maker Protocol while ensuring that all users, both Dai holders, and Vault users, receive the net value of assets they are entitled to based on the Protocol’s smart contract parameters.
If enough voters believe taking the action is necessary, MKR holders can instantly trigger a Shutdown by depositing their MKR into the Emergency Shutdown Module (ESM).
About 50,000 MKR must be deposited into the Emergency Shutdown Module to trigger an Emergency Shutdown.
Maker Use Case: Debt Recapitalization
The stability fees and liquidation penalties paid by borrowers are normally enough to keep the Maker platform running smoothly and maintain its balance sheet.
However, there are some instances where these fees might not be enough to cover all the losses it experiences. Some of such losses could be due to a fall in the price of the crypto assets that borrowers use as collateral.
For instance, if ETH or BMB is used as collateral to borrow DAI and it experiences a big reduction in price, Maker might find it difficult to recapitalize or restore the losses.
When this happens, extra MKR supply is minted and sold in the market to raise enough funds to cover the loss.
However, MKR holders must vote on such a recapitalization decision, as minting more MKR supply will negatively affect the token’s price. These voters have a responsibility to carry out effective platform governance to avoid a decrease in the price of MKR.
The Future of MakerDAO
It’s no doubt that Maker as a DeFi project and MKR as its utility token have a solid future ahead of them. Maker has a strong ecosystem that has continually stood the test of time, as it is one of the oldest successful DeFi platforms today.
The Maker DAO team has some great plans that will help increase the value of the platform and increase adoption in the long run. One of such plans is to dissolve the Maker Foundation and transfer the project’s full governance to MKR holders. This could further lead to an increase in the value of tokens.
As DeFi or decentralized finance space continues to grow and advance, MakerDAO and its MKR token will continue to be at the forefront of this growing industry.