MakerDao: Why is it a hit? Understanding MKR and DAI

It is certainly one of the best known, one of the oldest (and also one of the most successful) of the Ethereum blockchain. MakerDAO is one of the most used DeFi platforms in the Ethereum DeFI ecosystem. Currently, there is over $10,518,956,203 in ETH locked in this protocol, making it the 19th protocol used on Ethereum. This tells you that we are dealing with a rather important protocol in the crypto universe.

Understanding how MakerDao works also means understanding the protocols and DeFi as a whole a little better.

To summarize what we can do on MakerDao, let's say that we can borrow and save a stablecoin (DAI) without having to resort to an intermediary. By placing locked cryptocurrencies, we also earn passive income from DAI.

And what interests us in this article is to better understand how it works and to understand why it is a successful project. He has become an emblematic figure in the DeFi scene, particularly for loans, and you will see that ultimately, he did not steal his good reputation.

Basically a decentralized organization (a DAO) which will exploit smart contracts to manage borrowings and loans. There are also two cryptos in this ecosystem: DAI and MKR which allow the value of loans to be balanced.

When we use the word “balance”, it should catch your attention. In fact, in the beginning, when new borrowing/lending projects on DeFi were launched, the real problem they faced was the high volatility of crypto prices.

In fact, if a person borrowed x amount of crypto, they could have to repay a much higher amount (or lower in the best case scenario). And, this could happen over a relatively very short period of time.

It is to solve this problem that MakerDao intervened in the cryptosphere. His brilliant idea was to combine pêts with a stablecoin.

Thus, people who borrow on MakerDao can predict with some reliability the amount they will have to repay.

So, if the collateral for a loan falls below a certain point (for example, if ETH drops a lot relative to the DAI borrowed), then the loan is automatically liquidated. The ETh which served as guarantee then immediately came to repay the loan.

It is therefore a well thought-out system, which self-regulates in some ways and above all allows the stability of loans/borrowings, while preventing possible abuses.

MakerDao Overview

MakerDao was designed by a Dane, Rune Christensen who gained a lot of credibility with this project. This is logical you might say because the project is stable, well thought out and it once again provides a far from negligible solution in the lending/borrowing system on DeFi.

In 2018, one of the best-known crypto venture capital firms, Andreessen Horowitz, invested $15 million and purchased 6% of the total token supply, Maker (MKR). This shows how MakerDao was immediately able to attract the biggest investors.

To use MakerDao, and since we are in a very popular DeFi project, you will simply need a wallet like MetaMask for example and Ether to be able to use MakerDAO directly.

Thus, you must lock the quantity of your choice of a crypto like ETH, for example in smart contracts to receive a certain amount of DAI in return. The more ETH you have derusted, and naturally, the more DAI you will have.

DAI is a stablecoin indexed to dollars, a bit like Tether (USDT) with dollars as well. Let's say that there is less scandal with the DAI ;).

What should be remembered in the mechanism is that the ETH blocked on MakerDAO serves as guarantee collateral. When users want to unlock their ETH, they therefore simply have to repay the loan while also paying any fees.

Likewise, if the locked ETH falls even lower and this proves not to be enough to repay the loan, then in this case MKR tokens are sold to repay the loans.

What are the benefits of using MakerDao

Already, as on all DeFi platforms, there is no need for user verification. Unlike a bank which will give you a complete check-up of your financial situation since your birth, there, on DeFi, we are all in the same boat. We can all borrow, without any conditions upon entry.

If you were wondering why lending and borrowing services work so much on DeFi, you have the first part of the answer.

What makes these services so popular is the fact that the liquidity is there. Basically, from the moment a user wants to borrow, they will have their funds, in a few seconds, after just a few clicks. Yes, for a novice who comes from traditional finance, this seems simply incredible.

In fact, what contributes to the ever-increasing success of MakerDao is certainly the fact that there is an automated system which takes into account counterweights in the event of excessive fluctuations in the price of ETH (mainly). Having DAI integrated allows for this balance and is why, perhaps of all lending platforms, MakerDao is first in class.

Understanding the MKR token and its usefulness in the MakerDAO ecosystem

To better understand MakerDao, you need to understand the usefulness of the elements.

DAI is an ERC20 token on the Ethereum blockchain. 1 DAI is always worth 1 US dollar. This is the keystone of MakerDAO. When a person requests a loan on MakerDao, DAI is created. It is DAI that users borrow and repay. It is thanks to the DAI that things are balanced, in a way.
The MKR token is the native token of MakerDao and it is also an ERC-20 token. Its purpose is to support the stability of DAI. Beyond that, the MKR token is also a governance token through which users can vote on the project's biggest decisions.

The price of Maker currently is €4 EUR. MKR is in 456,61rd place on CoinMarketCap with a market capitalization of €33 EUR. The circulating reserves are 4 MKR. We can see in the curve opposite the incredible increase in the MKR which is certainly gaining great credibility from users.

MKR is created based on the DAI exchange rate with the US dollar. If DAI is stable against the dollar, then MKR will be burned to decrease the total supply of the token. If in the opposite case, DAI is too "far" from the dollar exchange rate, then in this case, MKR will be created to increase the total supply of the token.

You can buy MKR today on the majority of exchanges like Uniswap, Binance or Okex.

Final word on the future of MakerDAO

Over time, MakerDao has become one of the emblematic figures of DeFi, that’s for sure. Likewise, Dai has gained a lot of credibility also in part because of the too regular setbacks of Tether, the most used stablecoin until now.

Likewise, the success of MakerDAO is also due to the fact that it is involved in a very large ecosystem. These partnerships also contribute greatly to the ever-increasing notoriety of MakerDAO and DAI indirectly.

DAI can be found on the largest exchange platforms. Coinbaseor a Bitpanda through Binance and Probit

That said, since its launch in 2017, the company has undergone various updates and some people have questioned its back-up system with the MKR token. What we can say nevertheless, despite everything, is that it works despite everything and that the DAI indeed turns out to be stable or in any case, this makes it possible to make the protocol more stable.

The fact of having integrated two tokens indeed turns out to be a good compensatory system; This may make you think in an even more sophisticated version of the TerraBlockchain and its Luna token in the same principle, roughly.

If you are interested in lending and borrowing in DeFi, this can be a great option indeed. Also, in terms of investment, if you returned early enough, you are certainly very happy with your investment.

We are currently in a bull market and knowing whether or not to invest in MakerDao is not an easy thing even if we can assume - from a fundamental perspective - that the more users will enter, the more MakerDao will find convinced users.

So, of course, many people like to use borrowing/lending services on centralized sites like Nexus or even Youhodler For example. That said, for those who prefer to do it on DeFi, MakerDao is a must. That said, the competition is becoming ever fiercer and we will present other protocols that are just as interesting.

Here are the main points of what you need to know about MakerDAO; Hope this helped you see things a little more clearly.

We are preparing other articles to delve deeper into the subject, because yes, there are still plenty of things to know!

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