• Cryptoasset Report
  • November 14, 2018

MakerDAO seek to establish a stable cryptocurrency that, by maintaining consistent value, can function as a viable medium of exchange and store of value.


Maker is a decentralized lending and stablecoin issuance protocol. At a foundational level, the Maker system allows users to receive cryptoasset-collateralized loans. These loans, however, are in the form of a stablecoin, Dai, that seeks to maintain a peg with the U.S. Dollar. In addition to its lending functionality and support of Dai, the Maker system also allows Dai holders to earn yield through the Dai Savings Rate (DSR), a protocol-level yield-paying feature. Maker is governed by a combination of the Maker Decentralized Autonomous Organization (DAO) and the Maker Foundation. Maker only initially offered Ether as a collateral type, however, since transitioning to the new multi-collateral DAI (MCD), the system now supports Basic Attention Token (BAT) and USD Coin (USDC) as collateral. Governance decisions within the MakerDAO are mediated by the MKR token, which affords the bearer a vote on the system’s risk parameters, proportional to their share of the total MKR supply. The ability for MKR holder’s to influence network governance—particularly to set the network’s risk parameters— makes the system potentially collectively autonomous in respects that traditional financial services organizations are not. CTO Andy Milenius worked as a software engineer for AWS prior to working on Maker via Dapphub, an R&D organization focusing on Ethereum dApps.

Protocol Details

Maker’s Vaults allow users to generate Dai as a result of depositing collateral. Dai is then withdrawable, up to a limit. This collateral will be locked until the amount of Dai originally generated is repaid. Vaults are overcollateralized by at least 50% (and presently significantly more so) to mitigate the risk that the value of Dai, as pegged to the USD, comes to exceed that of its corresponding collateral in the event of a decrease in the value of the underlying collateral.

Whilst this seeks to allow convertibility of one’s stablecoin back into originally agreed fiat value and does so in an entirely on-chain manner that appeals to many in the crypto community, the system also presents a significant cost of capital. In addition to the requirement that Dai must be repaid before collateral is available to the user again, there is a stability fee that must be paid. This fee is denominated in Dai and must be paid in MKR.
Another key feature of the Maker platform is its ability to facilitate a decentralized margin trading platform: users can long or short ETH/DAI pairs and others as more forms of collateral are added to the network. For example, if someone cared to go long on ETH/DAI, then they might do the following: deposit ETH to the Maker platform in a Vault and take the generated Dai and use this to buy more ETH. With a conviction that ETH is going to increase in value, this user has been able to effectively borrow more ETH from Maker on the condition that it will be returned (or, more precisely, the corresponding Dai will be repaid to the Vault) and requisite fees settled (in MKR).

Maker transitioned from its original single-collateral design, now known as single collateral Dai (SCD), to multi-collateral Dai (MCD) in November 2019. Among its principal changes, were the support of new collateral types and the introduction of the Dai Savings Rate (DSR) that allows holders of Dai to earn yield by locking-up the stablecoin and theoretically contributing to the stability of the Maker system. Maker swiftly added Basic Attention Token (BAT) as its first new collateral type and it was expected that other ERC20 utility tokens would follow. However, after a period of extreme turbulence in the cryptoasset markets and a precipitous drop in the price of Ether, Maker’s liquidation system, designed to maintain sufficient collateralization in response to price changes in the collateral base, failed to respond quickly enough, in turn leading to an undercollaterilization of the entire system. While the Maker governance community discussed shutting down the Maker system altogether, ultimately, the stakeholders decided in March 2020 to mint 20,980 MKR holders to raise 5.3 million additional Dai and re-collateralize the system, diluting the value of existing MKR. Furthermore, in an attempt to prevent such a situation happening again, the governance body voted to add another USD-pegged stablecoin, USD Coin as the third collateral type in March 2020. This decision has challenged the notion that Maker is a decentralized protocol, in that it now relies on a centralized asset to achieve stability. The longer-term vision of MCD includes the support not only of additional cryptoassets as collateral but also off-chain, real-world assets including securities and real estate.

Asset Details

Dai (ERC-20 standard) is intended to act as a decentralized stablecoin pegged to the USD, hopefully, achieved via a combination of Vaults, feedback mechanisms and ‘appropriately incentivized external actors.’ The other token in the Maker ecosystem is the MKR token (also ERC-20 standard), of which 1 million were initially created. While there is no default inflation of MKR, new tokens can be minted to backstop the Maker system in the event of it becoming undercollaterilized in order to raise additional Dai. MKR is the only acceptable token to pay ‘stability fees’ on one’s Dai, which is obtained in exchange for collateral locked away in Ethereum smart contracts. Holding MKR grants individuals to voting rights on key parameters within the network, such as determining the rate that Dai’s price should be corrected, in the event of perturbation from the peg, by external actors motivated by market opportunities (market makers) called ‘Keepers’. In February 2017 a $45 million development fund was announced by Maker and L4 to encourage usage of Dai.