The most prominent feature of cryptocurrencies and crypto-assets is their volatility. Constant fluctuations in the price of crypto-assets and cryptocurrencies on a global scale often lead to concerns regarding crypto adoption. As a result, protocols such as MakerDAO have significantly impacted the cryptocurrency community.
It has become a crucial answer to any questions and uncertainty about the repayable amount on crypto loans. So, it seems MakerDAO works like a crypto lending platform, right? Well, there is more to MakerDAO, and you’ll need much more to see how it works and serves functionalities.
MakerDAO is basically a peer-to-peer or decentralized organization concentrated on developing technology to facilitate borrowing, savings, and lending functionalities with a stable cryptocurrency, and all that on the Ethereum blockchain network.
This crypto protocol allows anyone with Ether and a Metamask wallet to participate in mentioned borrowing and lending. Also, you can lend yourself money in the form of a cryptocurrency, DAI.
Users must lock in a certain amount of Ether in the smart contracts of the MakerDAO protocol in order to create a specific amount of DAI. To put it simply, you have to pay Ether as collateral for the DAI loan.
When you wish to unlock your ETH from the platform, you have to pay back the loan with other fees that occurred in the process alone. The optimistic features of the peer-to-peer borrowing, lending, and savings protocol power the further interest in it. Somehow it reminds us of DeFi solutions.
The following significant component in a MakerDAO account is the protocol’s backstory. You must know what sparked the creation of such an unusual protocol.
Surprisingly, the decentralized lending platform is one of the first examples of DeFi. Rune Christensen, the creator of the platform, is presently its CEO. It also raised $15 million from venture capital firm Andreessen Horowitz in 2018.
The basic idea for using a platform like MakerDAO is to replicate the procedures followed for blockchain lending and borrowing. In a trustless environment, one may wonder how borrowing works without any credit checks when there are none.
When it comes to resolving a problem, the popular solution frequently leads you to liquidity, which implies the ability to transform an asset into capital. The MakerDAO crypto protocol created the potential for liquidity in cryptocurrency lending and borrowing.
For example, if the collateral for a particular loan, such as ETH, has dropped by a significant amount below the DAI loan value, the debt is liquidated. As a result, the platform may sell off ETH collateral to repay loans borrowed in DAI, as well as fees and penalties. You can see how liquidity and the threat of liquidation keep lending and borrowing on blockchain steady.
How does it work?
Recently, the popularity of the MakerDAO protocol has doubled. In fact, it is one of the most commonly used and longest-running projects set in the DeFi environment. The protocol includes a combination of smart contracts utilized on the Ethereum blockchain.
The Maker protocol aids in simplifying the crypto loans against collateral that borrowers placed. However, in the case of Maker, the collateral is different from traditional loans, cash. Instead, users have to borrow loans against several crypto pairs that the protocol supports.
Basically, borrowers deposit the collateral in smart contracts. In reality, the Ethereum smart contracts that govern the MakerDAO crypto lending protocol establish all of the terms for making and managing bitcoin loans.
Furthermore, The Maker Foundation holds the copyright to the Maker protocol, which allows for full ownership transfers of crypto assets. The Maker Foundation is particularly important because it supports the functionality of the Maker protocol as a completely Decentralized Autonomous Organization or DAO.
Both DAI and MKR tokens are important elements of the protocol, with each token performing distinct roles.
To begin, you should know that the DAI token is a constant cryptocurrency that is linked to the US dollar. DAI’s performance is largely dependent on market conditions. It functions as the means for borrowers to obtain loans against the platform’s collateral.
Maintaining the MKR token is critical for MakerDAO’s crypto protocol since it allows liquidity. The platform may easily manage issues caused by the accumulation of bad debts thanks to the use of MKR tokens.
The MKR token has several important features in the protocol, particularly governance. Users can use MKR tokens to exercise governance rights and help shape the platform’s development. MKR token holders are frequently the final resort for borrowers. If collateral does not cover the amount of DAI loans in circulation, the protocol creates MKR coins and sells them as a last resort.
The stability of the DAI is primarily determined by collateral assets in the Maker Vaults of the protocol. Furthermore, collateral assets back the DAI and maintain its stability.
In other words, a collateral asset is any digital asset that MKR token holders have determined to be suitable for the protocol. If the Maker system is implemented, any type of Ethereum-based property would be able to utilize it. Furthermore, MKR token holders will have to give consent for particularly dangerous risk factors in each authorized collateral.
MakerDAO’s work is further enhanced by Maker Vaults, which is another important highlight. You’ve undoubtedly heard a lot about depositing collateral in smart contracts on the Maker protocol in order to receive crypto loans.
The Maker Vaults in the protocol are the smart contracts that allow you to use all of the protocol’s supported collateral assets to create DAI. Users can use the Maker protocol to construct Maker Vaults. You may take advantage of a variety of user interfaces and network access points provided by the community.
The procedure for generating Maker Vaults is straightforward, although it has a few complexities owing to the need to repay DAI and pay stability fines for unlocking the collateral held in the vaults.
The next major feature of Maker Vaults in the MakerDAO platform is that they are non-custodial by design. As a consequence, users may interact directly with the Maker Vaults and the protocol itself.
The collateral in the protocol is also maintained on a decentralized, distributed architecture. Users may modify their collateral as long as its value does not fall below a predetermined minimum level.
The Maker protocol and vaults’ smart contract infrastructure demonstrates how MakerDAO functions as a decentralized crypto lending platform. There is more to the operation of the Maker protocol than simply its smart contracts, though.
External actors are needed to keep the MakerDAO ecosystem operating. The external actors that contribute to the MakerDAO ecosystem and offer value to the platform are listed below.
A keeper in the Maker protocol is a liquidity provider that receives incentives through arbitrage opportunities for providing liquidity.
The Emergency Oracles in Maker protocol act as a last line of defense against assaults on the platform’s governance or other oracles.
A decentralized oracle platform underpins the MakerDAO crypto protocol, which uses a decentralized oracle infrastructure to get real-time data on collateral asset market rates from the Maker Vaults. Price Oracles are important in determining when it is time to liquidate.
In addition, the DAO builders’ shared platform helps to contract DAO teams, including individuals and service providers, for governance processes. Surprisingly, DAO team members are independent market players, adding confidence in the protocol’s governance.
MakerDAO use cases
The final highlight in any discussion around MakerDAO and its capabilities is of course its real-world applications. The Maker protocol’s one apparent use case is evident in crypto lending features.
The Maker protocol and its DAI stablecoin provide a useful platform layer foundation for other DeFi protocols to grow on. UNICEF, for example, uses a DAI stablecoin to raise money for blockchain-based open-source projects on social issues. Other notable Maker ecosystem DeFi applications include Uniswap and Outlet.
Finally, MakerDAO’s applications in the gaming industry may be used to create tokenized in-game assets. The platform also aims to get DAI into the art world by offering incentives to artists who sell their work as NFTs.
To summarize, the basic idea of MakerDAO’s crypto lending platform is appealing for long-term expansion. The Maker protocol solves one of the long-standing problems with borrowing and lending on blockchain networks by providing liquidity.
The Maker protocol also benefits from the assurance of trust that smart contracts provide. The Maker protocol enables users to have control with the support of two distinct tokens: DAI and MKR. Furthermore, the emphasis on DAO and external actors is an important component of the Maker protocol’s success.