What is MakerDAO? Simply put, it is a decentralized platform that allows for creating and deploying Decentralized Autonomous Organizations (DAOs). But what does that mean in practical terms? And more importantly, what are the potential applications for MakerDAO? Let’s explore the nuts and bolts of MakerDAO and uncover some amazing possibilities this technology offers.
What is MakerDAO
In the world of decentralized finance (DeFi), MakerDAO is the incumbent. Launched in 2015, Maker is a lending platform that allows users to lock their crypto assets as collateral to borrow Dai, a stablecoin that’s pegged to the US dollar.
Though newer, shinier projects often overshadow it, Maker still dominates the DeFi space in terms of both Usage Volume (TVl) and Locked Value (TVL). In fact, with a TVL of over $7,3 billion, Maker is currently the most valuable DeFi protocol. So, what’s the secret to its success? Let’s take a look.
MakerDAO’s key features
Maker is a decentralized autonomous organization (DAO) that runs on the Ethereum blockchain. The organization consists of three parts:
– The first is the smart contracts that run on Ethereum and handle all of the Makers’ business logic.
– The second part is the community of MKR token holders who govern the protocol.
– The third part is Maker Labs, which funds development and adoption initiatives.
-And, of course, Dai. Dai is a decentralized stablecoin that is pegged to the US dollar. Dai is created when users lock their crypto assets (such as ETH, BTC, BAT, and others) in the Maker smart contracts as collateral. The value of the collateral is then used to generate Dai through a process called “collateralized debt position”
How does MakerDAO work?
If you want to borrow Dai, you must first deposit an Approved collateral type into one of Maker’s CDP Portal smart contracts. Once your deposit is processed, you’ll receive Dai that’s equal to a fraction of your collateral value – this fraction varies depending on the collateral type but is always above 125%.
When you’re ready to repay your loan plus interest, you simply have to send back the amount of Dai you borrowed plus stability fees—currently 0.5% per year—to one of Maker’s Freezebox smart contracts. This will trigger an auction where MKR token holders vote on whether or not to liquidate your collateral. If MKR holders vote to sell your collateral, they’ll do so at a price that covers your loan plus interest and allows them to earn a bit of profit on top. If they decide not to sell it, you can keep your collateral and continue borrowing more Dai up to the maximum loan multiplier for your chosen collateral type – currently 4x for ETH.
MKR token holders can also vote to change things like Stability Fees and the maximum loan multiplier for each collateral type. That’s why they’re called “Governance Tokens” – because holders use them to maintain and improve the protocol over time. Of course, MKR isn’t the only Governance Token out there—in fact, it’s just one small part of the much larger DeFi ecosystem.
What are the benefits of using Maker DAO?
Passive Income Opportunities
With Maker, you can generate Dai by collateralizing ETH with a loan. Essentially, you’re putting your ETH up as collateral and borrowing against it, similar to how you might take out a mortgage on your home. The Dai you generate can be used for any number of purposes, from buying other crypto assets to paying bills or shopping online. And because Dai is pegged to the USD, its value remains stable even when ETH’s price fluctuates.
Not only does this allow you to earn passive income, but it also allows you to keep your ETH rather than sell it to meet your financial obligations. That way, you can still benefit from any future ETH price increase while still having access to the cash you need in the present.
Reduced Risk of Volatility
As we mentioned above, one of the main advantages of Dai is that its value is pegged to the USD. This means that no matter how much ETH’s price fluctuates, each Dai will always be worth $1. This stability makes Dai an ideal currency for both short- and long-term investments and everyday use cases like paying bills or shopping online.
In contrast, cryptocurrencies like ETH can be incredibly volatile. For example, in early 2018, ETH’s price rose from around $700 to over $1400 in just a few months. However, by December 2018, that same ETH was worth less than $100.
After the Merge, ETH’s price quickly rebounded and reached an all-time high of over $2000 in February 2020. However, it has since dropped back down to around $600 as of June 2020. As you can see, ETH’s price can change very rapidly, and these sudden changes can be difficult to predict.
While this volatility can certainly be advantageous for skilled investors who know how to take advantage of it, it makes cryptocurrencies like ETH less suitable for everyday use cases.
Accessibility
Another great thing about Dai is that it’s accessible to almost anyone with an internet connection and a digital wallet—all you need is some ETH to collateralize. In contrast, traditional banking systems can be quite inaccessible, particularly for those living in developing countries who may not have access to traditional financial institutions like banks or credit unions.
Moreover, even if you have access to a traditional bank account, there are often numerous fees associated with different banking services – fees that can be avoided using Dai.
The potential applications for MakerDAO
The potential applications for MakerDAO are vast, but here are a few key examples:
Lending platforms
With MakerDAO, users can get loans without going through a centralized lending platform like banks or other financial institutions. Instead, they can simply post collateral to a CDP and generate Dai.
Payments
Because Dai is pegged to the US Dollar, it can be used in any number of payment scenarios – from everyday purchases to business payments.
Stablecoins issuance
The Dai stablecoin can be used as a foundation for other stablecoins that are pegged to fiat currencies or even other cryptocurrencies.
How to get started with MakerDAO
To become a member of MakerDAO and take out a loan in Dai, there are a few steps you need to follow.
First, you’ll need to have some Ethereum. There are several options to do that, the best one being through reputable exchanges. Once you have your Ethereum, you’ll need to deposit it into a wallet that supports ERC-20 tokens. (TRASTRA now supports TRC-20) We recommend MetaMask or TRASTRA.
Once your Ethereum is deposited into your wallet of choice, head to the Maker Portal and click “Create” under the “New Wallet” section. From there, you’ll be able to set up your new Maker vault.
Now that your vault is set up, you’ll need to deposit some ETH into it as collateral. The minimum amount of ETH required is 0.5 ETH, but we recommend depositing more than that to avoid being liquidated.
Once you’ve deposited your ETH into your new vault, congratulations! You are now a member of MakerDAO and can take out loans in Dai. When you’re ready to repay your loan plus interest, simply head back to the Maker Portal and click “Wipe” under the “Actions” section.
The future of MakerDAO
With the launch of Multi-Collateral Dai (MCD), the Maker team has been busy working on governance improvements, new collateral types, and a host of other features to make Dai more useful and accessible. But what does the future hold for MakerDAO? We asked a few defi enthusiasts to weigh in.
“I think the most important thing for MakerDAO to focus on right now is risk management,” says Anthony Pompliano, CEO of Morgan Creek Digital. “With the addition of new collateral types and the growing size of the Dai ecosystem, there’s much more at stake now than there was a year ago. Maker needs to ensure that it has the right processes and controls to avoid any major disruptions.”
Pompliano also believes that we will see more central banks experimenting with digital currencies over the next few years, which could be a big tailwind for MakerDAO. “If central banks start buying Dai or using it as a reserve currency, that could have a significant impact on price discovery and help to drive further adoption,” he says.
Another important area for MakerDAO to focus on is user experience, according to Alex Masmej, co-founder and CEO of Niveza. “One of the main barriers to entry for DeFi is still complexity,” he says. “The user experience needs to be simplified if Maker wants to keep growing its user base.”
Instead of Conclusion: The potential implications of DeFi on the global scale
In just a few years, the world of finance has been turned upside down by the rise of decentralized finance. By utilizing the power of blockchain technology, DeFi platforms have allowed users to trade, borrow, and invest without the need for centralized intermediaries like banks or financial institutions. This has led to a surge in activity in the DeFi space, with over $55 billion worth of value locked into DeFi protocols as of September 2022.
Here’s what it means for the future of finance:
Increased Access to Financial Services
One of the most important implications of DeFi is that it has increased access to financial services for people worldwide. By utilizing decentralized exchanges and lending platforms, people who previously did not have access to traditional financial institutions can now trade cryptocurrencies and access capital on terms that suit them. This is a particularly important development for people living in countries with unstable economies or repressive regimes, as it gives them a way to store value outside of their local currency.
More Freedom and Flexibility
Another key implication of DeFi is that it gives users more freedom and flexibility in managing their finances. With traditional financial systems, users are often locked into inflexible products and services that don’t meet their needs. However, because DeFi platforms are built on Ethereum, they can be easily integrated with each other to create customized solutions that fit each user’s individual requirements. This increased freedom and flexibility is one of the main reasons why so many people have been drawn to the DeFi space in recent years.
Greater Transparency and Security
Another potential implication of DeFi is that it could lead to greater transparency and security in the financial system as a whole. Traditional financial institutions are often opaque about their operations and how they use customer funds, which can lead to mismanagement and fraud. However, because DeFi protocols are open-source and built on Ethereum’s public blockchain, they are much more transparent about their operations. This increased transparency could help reduce fraud and mismanagement in the financial system overall.
As you can see, there are many potential implications of DeFI on a global scale. From increased access to financial services to greater transparency and security, it’s clear that DeFI is set to have a big impact on the future of finance. So whether you’re an investor, trader, or just someone interested in finance, it’s worth keeping an eye on the evolving world of DeFi.
FAQ
What is MakerDAO?
MakerDAO is a decentralized finance platform built on the Ethereum blockchain. It allows users to trade, borrow, and invest without the need for centralized intermediaries.
What are the potential implications of DeFi on a global scale?
Some of the potential implications of DeFi include increased access to financial services, more freedom and flexibility for users, and greater transparency and security in the financial system.
What is the difference between MakerDAO and other DeFi platforms?
One of the main differences between MakerDAO and other DeFi platforms is that MakerDAO is built on the Ethereum blockchain. In contrast, many other DeFi platforms are built on other blockchain protocols. This means that MakerDAO can take advantage of Ethereum’s features, such as smart contracts, to offer more features and benefits to users.
How can I get started with MakerDAO?
If you’re interested in getting started with MakerDAO, the best place to start is the MakerDAO website. You can find all the resources you need to get started, including a beginner’s guide, an overview of the platform, and a list of exchanges supporting MakerDAO.
What are the risks associated with MakerDAO?
Like with any investment, there are always risks involved. Some of the risks associated with MakerDAO include the potential loss of funds, price volatility, and platform risks.
What are the benefits of using MakerDAO?
Some of the benefits of using MakerDAO include the ability to trade, borrow, and invest without the need for centralized intermediaries, increased transparency and security in the financial system, and more freedom and flexibility for users.
