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MakerDAO Collateralizes, Uses, and Protects Its DAI Stablecoin

In this article, we have a look at the Maker community. MakerDAO is part of this community. We will show you how they handle the various aspects of their DAI stablecoin.

What Is the Maker Community?

The Maker community consists of four parts. Here’s a brief introduction to all four of them.

  1. MakerDAO — An open-source project on Ethereum, created in 2014. MKR governance token holders manage the Maker Protocol. This includes the financial risks of DAI. The more MKR you stake, the more decision-making power you have.
  2. Maker Protocol — Built on Ethereum. It allows you to create currency. Current elements are, for instance, the DAI stablecoin or the Maker Collateral Vaults. Oracles and Voting also play a role. It’s one of the largest dApps on Ethereum.
  3. Maker Foundation — They built and launched the Maker Protocol. With the MakerDAO community, they bootstrap decentralized governance. Their goal is complete decentralization.
  4. DAI Foundation — They are self-governed. They are also independent of the Maker Foundation. The Maker Protocol can’t technologically decentralize everything. This is what the DAI Foundation safeguards.
How Is the DAI Collateralized?

The Maker Protocol collateralizes the DAI stablecoin. It is also known as the Multi-Collateral Dai (MCD) system. Maker Governance approved which assets you can use as collateral. The DAI has an overcollateralized setup. This means that your collateral needs to be higher compared to the number of DAI you get. For example, $1.50 in collateral will give you $1 in DAI.

Furthermore, the DAI is soft-pegged to the U.S. dollar. It’s also decentralized and unbiased. DAI is also the number one crypto-backed coin. 

In its first version, it was single collateralized. You could only use ETH as collateral. Hence, it was also known as SAI. The SAI launched in 2017. In 2019, we saw the DAI, a multi-collateral-backed stablecoin. The DAI accepts any Ethereum-based asset as collateral. As long as the MKR holders approve it. The MKR holders, or the MakerDAO, also vote on the risk parameters for each collateral asset. 

Currently, there is just over $10 billion locked in assets as collateral. The collateral rate is at 137.66%. Just to clarify, be aware that this number fluctuates on a regular basis. See the picture below.

Source:

The Maker Vault

Your collateral goes into a Maker Vault. This is where Maker generates your DAI. This whole process works with smart contracts. So, you start with locking up your collateral in a collateralized debt position (CDP). There’s also a liquidation ratio. To clarify, currently that is around 1.38x. You get 100 DAI for $138. If your collateral drops below 138%, there’s a penalty fee. 

Furthermore, you get liquidated if you don’t repay your DAI with the added stability fee. The latter is a continuously accruing interest. This is a flexible fee, and it adds in the vault to your collateral. It’s part of the DAI Risk Parameter. Maker added this to cover the basic risk in minting DAI against collateral. They use part of this fee to cover operating costs of the protocol. The Maker’s governing body can change this rate by voting. It’s an essential part to keep the DAI pegged to the U.S. dollar. See the Twitter thread below.

What Are the Use Cases for the DAI?

The DAI has a variety of uses cases. We have a look into the most important ones.

  • It serves as money, since it can fulfill the same functions as money.
  1. Store of value — It’s stable.
  2. Medium of exchange — Use it for all types of transactional purposes around the world.
  3. Unit of account — Within the Maker Protocol and some blockchain dApps, it functions as a unit of account.
  4. Standard of deferred payment — You can use it to settle debts within the Maker Protocol.
  • Inflation Protection and Savings

In countries with severe inflation, DAI is a stable alternative.

All around the space, platforms use DAI. You can find it on borrowing/lending platforms and in liquidity pools or farms.

  • Earn Interest

If you deposit DAI into the DAI Savings Rate smart contract, you earn interest.

integrated the DAI. For example, Axie Infinity or Forgotten Artifacts.

How Does Maker Protect the DAI?

To protect the DAI, there are several actors who each have a specific role.

  • Keepers

They help maintain the target price of $1. They sell or buy DAI when the price is off target.

  • Price Oracles

To keep track of internal collateral prices, Maker uses oracles. The MKR voters choose trusted oracle feeds. However, there’s also an Oracle Security Module (OSM). This delays all prices for an hour. If there’s a comprised oracle, a Maker Governance vote can freeze it.

  • Emergency Oracles

These can also freeze compromised oracles. The MKR voters select them. They can also trigger an Emergency Shutdown. This is a last-resort mechanism. It protects the Maker Protocol against attacks on its infrastructure.

Source: Maker docs

The Role of Governance

In this light, governance plays an important part in risk mitigation. Here are a few selected samples of this.

  • Malicious attacks on the smart contract infrastructure by a bad actor.

The Foundation looks after the security of the Maker Protocol. They also have had various security audits.

  • A black swan event

The Maker Protocol and good governance work together on this. They should help prevent or mitigate the outcome of such an attack.

Conclusion

This gives you a better idea how the MakerDAO plays an essential role in the Maker community. We showed you how the collateral for DAI works, and we talked about some use cases. Furthermore, we showed you some ways how Maker protects its DAI stablecoin.

If you like more in-depth information on the DAI, you can read their white paper. Another good resource is this PDF PowerPoint presentation

According to CoinGecko, the current DAI rate is at exactly $1. For market cap rank, DAI comes in at #13. The ATH stood at $1.22 on March 13, 2020. On the other hand, DAI reached an all-time low on November 25, 2019, with a price of $0.903243. 

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 8/4/2022

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