Lending and borrowing is one of the largest categories of the decentralized finance (DeFi) industry as measured by total value locked (TVL). Maker DAO is among the largest and oldest DeFi apps in this category.
The app lets you borrow its stablecoin DAI using ETH or other cryptocurrencies as a collateral. Maker uses a dual-token model, where in addition to DAI, there is a governance and utility token, MKR, that is actively used on the platform.
Currently, MKR trades at $2,486, with a supply of around 1 million tokens and a market cap of approximately $2.5 billion.
What Are Maker and MKR?
The Maker protocol is an open-source project that started in 2014 with the goal of
creating a permissionless credit system that would allow users to take out loans
collateralized by cryptocurrency. Maker is a peer-to-contract lending platform that enables over-collateralized loans by locking Ether in a smart contract and minting Dai, a stablecoin that is pegged to the US dollar.
MKR is a governance and utility token used on the Maker DAO platform.
As the second largest DeFi platform by market cap in the lending and borrowing category, Maker offers its users lending in the DAI stablecoin from the protocol by providing popular cryptocurrencies as a collateral, while MKR is used for the internal platform governance.
How Lending and Borrowing work on Maker DAO?
Originally, only ETH was used as a collateral crypto on the platform. However, as of now, Maker accepts collaterals in more than a dozen popular cryptos, such as WBTC, YFI, AAVE, UNI, and LINK, among others.
Users deposit the collateral into their personal “vaults” on the platform. As soon as the collateral is provided, the Maker protocol issues DAI coins to the user. DAI is pegged to the USD, and part of the Maker protocol’s functionality is responsible for maintaining this peg as closely as possible.
Each vault must be collateralized to 150% of the lent amount, meaning that if you want to borrow 100 DAI (about $100), you need to provide an equivalent of $150 in ETH or another accepted cryptocurrency as a collateral. By using this ample over-collateralization, Maker ensures the stability and viability of the platform.
Maker Coin Functions
While lending is carried out in DAI, the MKR coin is also used to fuel many of the important processes on Maker. MKR has three main functions on the platform:
- It is the platform’s governance token. Holders of MKR decide on all the processes and changes to Maker during a formal on-chain vote.
- It is a utility token involved in key platform operations dealing with fees and charges associated with the collateralizeddebt positions (CDPs) in Maker’s vaults.
- Additionally, MKR has a recapitalization function on Maker. If the value of the debt collaterals held on the platform decreases below a certain point, e.g., ifEthereum or another crypto that is held in the vault’s market price drops, the supply of MKR is increased, and the newly minted supply is then sold on the auction to raise funds and recapitalize the platform.
How Does MKR Work as a Governance Token?
MKR’s primary function on Maker is governance. Holders of MKR decide on all the proposed changes and other governance issues on the protocol. While DAI is also an important part of the Maker platform, DAI ownership gives you virtually no governance or decision-making rights on the protocol.
One MKR token equals one formal vote. Thus, the more MKR you hold, the better your ability to influence decision-making. In theory, this keeps Maker vulnerable to a 51% attack, whereby an actor who has more than half of the total MKR supply may dictate their rules to the platform.
However, Maker’s governance model allows for an Emergency Shutdown procedure to be triggered by anyone with at least 50,000 MKR if there is a danger or suspicion of such a takeover happening. The sum of 50,000 MKR represents around 5% of the total token supply, meaning that even some of the smaller among the platform’s major players can trigger the shutdown.
Maker uses a combination of on-chain and off-chain governance mechanisms, although the off-chain discussions have much lower weight on the platform, as they are non-binding and are frequently stopped in tracks by MKR holders’ preferences during the formal on-chain process.
Maker Off-chain Governance
The key online resources of Maker’s off-chain governance are the Maker DAO discussion forum and the Maker chat app. Anyone can propose and discuss ideas via these channels, particularly at the forum, and the ideas that get enough preliminary consensus may proceed further to on-chain consideration.
Unlike some other platforms, Maker is not using social media extensively for off-chain governance discussions. The platform encourages its stakeholders to keep these discussions primarily on the Maker DAO forum and the chat app.
Maker On-chain Governance
The two primary on-chain governance mechanisms on Maker are the Governance Polls and Executive Votes.
The Governance Polls are conducted continuously on a weekly basis to measure MKR holders’ sentiment and attitude towards various topics, including those that have been thoroughly discussed off-chain and now, can be good candidates to proceed further in the decision-making pipeline. The polls’ results do not affect the state of the protocol.
The Executive Votes are the formal on-chain votes among the MKR holders to decide on changes to the protocol. They can be introduced at any time and by any platform stakeholder, not only MKR holders. However, only MKR holders will have the voting rights during an Executive Vote.
Executive Votes might be based on results from Governance Polls, but they do not have to. At least in theory, an Executive Vote can proceed circumventing the Governance Poll stage. However, Maker has developed an established informal culture of discussing topics in an orderly pipeline from off-chain discussions to Governance Polls to Executive Votes.
How Does MKR Work as a Utility Token?
MKR is also used on Maker to facilitate a number of fee-related processes associated with lending. The two types of important fees on Maker involving MKR are the stability fee and the liquidation penalty.
The stability fee is an intricate name that Maker uses to represent the “interest rate.” Each debt position on Maker accrues interest repayable by the vault owner when they close the position. For example, if you borrowed 100 DAI from the protocol, and the stability fee is 2% per annum, then after one year, your total debt to pay back to the protocol will be 102 DAI.
The liquidation fee, or liquidation penalty, is a fee payable by a user in the event their vault, and thus the debt position, is liquidated by the protocol if it becomes dangerously under-collateralized.
For example, if you have locked some amount of ETH in a vault on Maker, after a while, if the ETH price drops, your collateral may not cover the Maker’s typically required 1.5 times collateral-to-debt ratio. In such a case, your debt is liquidated and you are charged the liquidation fees.
Maker collects the stability and liquidation fees from its user base on a continuous basis, and then sends the accumulated fees in DAI to a so-called Surplus Auction, where the collected DAI is sold for MKR. The MKR obtained through the sale are then burnt by the protocol to reduce the supply of the token. The key intent behind the burning of the obtained supply is to prevent MKR’s price loss.
How Does MKR Work as a Recapitalization Token?
Funds raised by Maker from stability fees and liquidation penalties should normally cover the platform’s balance sheet. However, theoretically, there might be a situation when even these fees might not cover all the potential losses from devaluation of the crypto assets held as collateral.
For example, if ETH and other cryptos used as collateral experience significant price declines, Maker might face a problem with recapitalizing its overall position. In this case, additional MKR supply is minted and sold on the market to raise enough funds to cover the gap.
MKR holders will need to vote on such a recapitalization decision. Since creating new MKR supply will negatively affect the token’s price, the holders have an incentive to carry out effective platform governance to avoid such a scenario.
Who Is Behind Maker?
Maker DAO was founded in 2015 by Danish cryptocurrency and DeFi space entrepreneur Rune Christensen. MKR and DAI tokens were launched on Ethereum in 2017.
Christensen serves as the project’s CEO. In addition to the autonomously run DAO, the project is supported by the non-profit Maker Foundation, which is responsible for the overall platform guidance until it can be fully executed by MKR token holders. US-based investment banking executive Steven Becker is the President and the COO of the Maker Foundation.
In a recent announcement, Christensen said that the Foundation will be dissolved in the months to come, and the Maker’s overall management and functioning will be carried out in a fully decentralized way by MKR token holders.
MKR Price History
MKR traded in the $500-600 range a year ago and until early 2021. From the beginning of the year, MKR started appreciating and reached its all-time peak price of around $6,000 in early May.
Similar to the majority of other cryptos, MKR was hit hard by the 2021 market crash, and has been on a largely declining trend since then. However, in recent weeks, the coin’s price has stabilized at around the $2,500 level.
What Is the Future for Maker and MKR?
Both Maker as a DeFi project, and MKR as a coin have a solid future ahead of them. Maker’s business concept has been thoroughly tested by time – it is one of the oldest DeFi platforms among the top 10, and has maintained a top 10 spot in the DeFi category for the last at least three years.
MKR acts as the backbone of Maker DAO and is considered a very valuable coin to hold on to. Some analysts opine that MKR is one of those truly HODL coins.
With Maker DAO’s plans to dissolve the Maker Foundation and transfer the project’s full governance to MKR holders, the token is likely to only further appreciate in value.
If there is a token that might be among the safest bets in DeFi, it is MKR. However, do note that the coin is poorly suited for just passive holding as an investment. MKR ownership encourages holders to actively participate in the governance of the Maker platform.
For crypto enthusiasts who want both good investment and active involvement in DeFi governance, MKR might be an ideal choice.