1. MakerDAO is the first and largest algorithmic-backed lending platform in Ethereum, and also the publisher of stablecoin DAI.
2. MakerDAO is widely regarded as the initiator of the DeFi era.
3. MakerDAO offers MKR as staking rewards and governance tokens. As long as anyone holds MKR, he/she has certain rights to manage MakerDAO.
4. The price of MKR is closely related to the development of the MakerDAO lending business.
MakerDAO is the first and largest algorithmic-backed lending platform in Ethereum, and also the publisher of the famous stablecoin DAI. In 2014, MakerDAO was founded in California; In 2015, the platform token MKR was born; In 2017, MakerDAO officially launched the stablecoin DAI. Because the lending project plays an important role in the whole DeFi ecosystem, MakerDAO is generally considered to be the initiator of the DeFi era.
From the perspective of Total Value Locked (TVL), MakerDAO's TVL currently exceeds US $15 billion, and its share still exceeds 20% of the whole DeFi field. For a long time, MakerDAO's TVL has occupied "half" of the DeFi field.
Source: defipulse.com
Decentralized lending services and Stablecoin Dai
From the user perspective, the operating mechanism of MakerDAO is very simple and can be considered the "central bank" of Ethereum. When users stake ETH on MakerDAO, MakerDAO will issue a corresponding number of DAI, which is somewhat similar to the process of the central bank issuing fiat currency according to gold reserves in the gold standard era. The price of DAI is bound to the price of USD.
MakerDAO regulates supply and demand by controlling the lending interest rate to maintain the anchoring between DAI and USD. At present, DAI is still the largest decentralized stablecoin.
Unlike the stablecoin issued by USDT based on
US dollar reserves, DAI is issued by pledging encrypted assets such as ETH. The value of this crypto stablecoin asset does not depend on real-world assets and is truly decentralized. On the other hand, due to the continuous fluctuation of the price of collateral (that is, ETH), it can also draw price risk to DAI. In order to avoid the risk of random price change, users need overcollateralization when lending DAI to ETH, and lend different amounts of DAI according to different collateral rates. When the price of collateral drops to a certain extent, the collateral will be liquidated at a price slightly lower than the market price (generally 97% of the market price) to avoid losses on the platform. Different digital assets have different collateral rate requirements. For Ethereum, the collateral rate needs to be greater than 150%, that is to say, ETH with a collateral value of $150 can only borrow $100, that is, 100 DAI at most. Due to the existence of an overcollateralization and liquidation mechanism, MakerDAO is very safe. For users, such as more aggressive borrowers may choose a lower collateral rate, which makes them face greater liquidation risk.
During the bull market, the decentralized lending service provided by MakerDAO is essentially a special form of long ‘hodl’; When the price falls, using a higher collateral rate to safely lend DAI can also ensure the holding of the original digital assets and give full play to the value of the assets as much as possible. Compared with the lending services of traditional financial institutions, the decentralized lending services provided by MakerDAO are completely controlled by code, with fast processing speed and high safety factor, avoiding the adverse effects of human factors.
MakerDAO and Governance Token MKR
In addition to stablecoin DAI, as a DAO project, MakerDAO also provides MKR as equity and governance token. As long as anyone holds MKR, it is equivalent to joining Maker, a DAO organization, to some extent, and has certain rights to manage MakerDAO. He/she can vote on key matters in the operation of MakerDAO. In addition, when users redeem Ethereum from MakerDAO, they need to pay MKR as the interest of borrowing DAI. When forced liquidation occurs, they also need to pay MKR as the penalty fee, which is generally 13% of the liquidated assets. These paid MKRs will be ‘burnt’ by the system, turning MKR into a deflationary situation as a whole. Therefore, the price of MKR is closely related to the development of the MakerDAO lending business and is a kind of stake token.
However, MKR holders also face the risk of eventual liquidation for MakerDAO. When MakerDAO has bad debts and insolvency due to the rapid decline of collateral price, the system will issue more MKRs to buy back DAI, which will also lead to the decline of MKR price. Therefore, the position of MKR holders in MakerDAO is similar to that of the company's shareholders. It is necessary to maintain the smooth operation of MakerDAO through prudent governance.
Conclusion
Compared with the centralized stablecoins such as USDT, DAI is completely open and transparent and has less audit risk. Meanwhile, the lending service provided by MakerDAO also provides a new choice for the flexible use of digital assets in hand.
Looking back on the development history of Ethereum, the birth of MakerDAO and DeFi is an important node that cannot be ignored. From IC0 in 2016 to DeFi in 2019, Ethereum has gradually developed into the world's largest public chain, and its positioning has gradually changed from "global computer" to "global settlement layer". At present, the DeFi ecology has been greatly developed. The importance of MakerDAO in the whole ecology may have declined, but its innovative ideas are still worth learning.
Author: Gate.io Observer:
Edward H. Translator:
Joy Z.
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