MakerDAO is an ambitious project intended at a decentralized future for cryptocurrencies. The development took three years to launch on the Ethereum mainnet.

Maker is a two-token system that comprises both the MKR and DAI ERC-20 tokens. Both use ETH as a trading pair. It utilizes the MKR token and CDP smart contracts to maintain the DAI token at $1. It’s only soft-pegged to the US dollar that can be transferred to another currency should the US economy fall.

Maker is a decentralized platform concentrated on decentralized exchanges. Many top decentralized exchanges back it with voting powers on the Maker platform are possessed by MKR holders, who are the buyers of ultimate resort for DAI stablecoin and are thus incentivized to keep the platform running.

What is Maker MKR and Maker DAI?

One of the biggest challenges to crypto’s mainstream acceptance as currency is the volatile pricing. Bitcoin as an example ordered at a price from $6,000 to $17,000 in 2018 alone. Nobody wants to pay 10,000 apparently worthless crypto tokens on a couple of donuts one day, only to observe the price jump to a price of over $100 million the next. The Maker DAI is a stablecoin intended to approach this volatility.

Tether (USDT) is seemingly the most well-known stablecoin, but it’s at the center of a lot of controversies. Critics and regulators question it’s supported by fiat currency, as its originators claim, although a recent report provided proof that dollars upheld the coin.

Either way, Tether lacks clarity, has a strong connection to the Bitfinex exchange, and was allegedly utilized to manipulate the price of Bitcoin and the crypto industry in 2017.

MakerDAO was founded by CEO Rune Christensen, uses a different strategy to stabilize DAI utilizing its proprietary MKR token. It’s an exciting approach that strictly follows fractional-reserve banking, in which a bank is only expected to hold a fraction of its deposit accounts.

Besides the collateral backing, DAI isn’t the US dollar or any other fiat currency, it’s Ethereum, and the whole system is created on blockchain technology and a smart contract ecosystem.

CDPs and What Purpose Do They Play in Dai Production

Most people don’t have an idea about what Collateralized Debt Positions. CDPs endure onto collateral assets that a user deposits and let that user generate Dai, a process that also accumulates debt. The presence of the debt indicates that the collateral assets are fastened within the CDP until the owner pays back the same amount of Dai. At this point, they can withdraw the collateral. An active CDP always has a greater collateral value than debt value.

How the Maker System Operates

For a user to engage with the Maker System, they must first generate a collateralized debt position.

Collateralized Debt Positions

To build Dai on the Maker Platform, a user must increase its Ethereum in Maker’s different smart contracts distinguished as Collateralized Debt Positions (CDPs). CDPs produce Dai for the user to use, they also collect interest over time identified as the “Stability Fee.”

At present, Pooled Ether (PETH) is the only collateral type accepted on the Maker Platform. To get Dai from a CDP, a user must first change his Ether to PETH.

User interaction with a CDP has four essential stages:

1. Making the CDP.

A user first transfers a transaction to Maker to create a CDP and must post his or her PETH to collateralize the CDP.

2. Generating Dai.

The user then transmits a transaction declaring the amount of Dai they want from CDP. As the user takes Dai, an equivalent amount of debt in the form of PETH is locked away in a smart contract.

3. Debt Reconciliation.

To obtain his or her collateral back, a user must pay off their outstanding debt in the CDP as well as repay a “Stability Fee” that essentially acts as interest on the outstanding debt. Stability Fees must be given in MKR while outstanding debt can only be paid back in Dai.

4. Withdrawing Collateral.

After the user’s debt and stability fee are paid off, the user can finally retrieve his or her collateral back by sending a transaction to Maker.

Use Cases for Dai

In the Dai Stablecoin System, there are numerous potential uses for Dai, pointed to as the “addressable market.” Those in prediction markets or employing gambling applications will already face a large amount of risk due to their forecasts and can reduce the potential further risk by conducting transactions with a stable token instead of a volatile cryptocurrency.

The CDPs in the system will implement the option of permissionless leveraged trading for hedging, leverage, derivatives, and financial markets. Governments and charities can see enhanced efficiency and less corruption with Dai because of its transparent accounting system.

Team

MakerDao was founded almost three years ago and has quickly grown from a tiny team to over thirty-five team members. MakerDao is lead by Rune Christensen, its CEO, and founder.

Conclusion

Maker DAO began the Dai Stablecoin System, which allows for a cryptocurrency (Dai), with a stable value pegged to the United States dollar. It enables users to invest in and take complete advantage of cryptocurrency without bothering about market volatility to the same degree that they would with unstable cryptocurrencies. There are various strategies in play to keep the value of Dai stable. With the integrity of Tether’s dollar reserves in question, Maker’s Dai gives a viable stablecoin substitute. Maker has created fully inspectable and transparent stablecoin system that is truly decentralized and trustless. The whole blockchain ecosystem should avail from the launch of Dai.