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Many new stablecoins have emerged over the past 18 months in the cryptocurrency space. Their development has partly been inspired by the need to fill a potential stablecoin void, as the first and most commonly utilized stablecoin Tether faces concerns. There is, of course, also ongoing impetus in the cryptocurrency space to develop less-volatile tokens which will be used more widely. Below we take a closer look at Maker, the governance token at the heart of MakerDAO.
What is Maker?
The Maker (MKR) token was created by MakerDAO and its primary purpose is to support the stability of MakerDAO’s DAI token and enable governance for the Dai Credit System. Holders of MKR make key decisions on the operation and future of the system.
MakerDAO has two tokens, MKR and DAI. The DAI is a stablecoin designed to provide an alternative to more volatile cryptocurrencies, as well as a new type of financial system. The MKR meanwhile, is used to keep the DAI stable. Traditional stablecoins use reserves of fiat currencies or even gold to peg a cryptocurrency to the value of these real-world assets to keep it stable. But that has proved problematic. MakerDAO uses the MKR token to act as a counterweight to price fluctuations.
Did you know?
Some stablecoins gain their lower volatility by being backed by fiat currencies and physical assets. Other stablecoins can be controlled through blockchain-based mechanisms or algorithms to maintain a required value.
What makes it so special?
The MKR token helps to keep its partner stablecoin DAI at the same value as $1. MKR can be created and destroyed in response to DAI price fluctuations in order to maintain DAI’s dollar-equivalent value. DAI uses a system of collateralization (essentially insurance), whereby holders act as part of the controlling mechanism to help manage the network.
DAI is issued when buyers purchase a smart contract based collateralized debt position (CDP) which behaves much like a loan. CDPs are bought with Ether (ETH) and DAI is given in return. ETH acts as the collateral to the loan, in much the same way as a house acts as collateral for a mortgage loan. The system means that individuals can, in essence, obtain a loan against their ETH holdings. When the loan is repaid the DAI is “burned” or destroyed. Fees occur in MKR along the way.
The MKR token is a solution for a scenario where the price of ETH falls too quickly for the DAI system to handle. If the collateral system is not enough to cover the value of DAI then MKR is created and sold to the market to raise additional collateral.
Did you know?
Smart contracts are simply computerized code which contains, and can perform, a set of
What can you do with Maker?
Holders of MKR gain voting rights in the Maker platform’s continuous approval voting system. MKR holders vote on things like the collateralization rate of CDPs. For participating they gain MKR fees as a reward. These holders are incentivized to vote in a way that benefits the system. If the system works well MKR’s value is maintained or increases. Poor governance would devalue MKR.
MKR is an ERC-20 token, constructed using Ethereum’s protocols. It can be stored in ERC-20 wallets and is tradeable on a number of exchanges.
Who created MakerDAO?
MakerDAO was founded in 2014, in California, by developer and entrepreneur Rune Christensen. Its core management and development team is 20 strong. After three years in development, MakerDAO finally launched the stablecoin DAI.
MakerDAO hope to create both a reliable stablecoin in DAI and a system of fair credit for everyone. Opening a collateralized debt position (CDP) using Ether means DAI can provide liquidity against crypto-assets.
A brief history
- 2014 – Maker DAO founded
- August 2015 – MKR token launched
- December 2017 – DAI stablecoin launched on the Ethereum mainnet
- October 2018 – DAI becomes the first cross-chain ERC-20 token on Wanchain
- September 2018 – Kraken lists MakerDAO's Dai.
- October 2019 – Ledn uses MakerDAO to disburse loans to the unbanked.
- December 2019 – Maker Foundation transfers control of MKR to Maker Governance.
MakerDAO’s efforts to create a stablecoin without concerns over reserve-backing are credible. With the collateralization mechanisms and the further failsafe of MKR, MakerDAO has a system to protect the value of its stablecoin DAI which could lead to its wider use.
As a further failsafe, MakerDAO has an emergency process called “global settlement.” Should something go wrong with MakerDAO’s system, a group of individuals holds settlement keys. These can be used to trigger a settlement where collateral held in CDPs is released to DAI owners in the equating value of Ether.
MakerDAO also works hard on transparency, it shares its regular meeting recordings online. As DeFi or decentralized finance became one of the biggest success stories in 2019, MakerDAO, and its MKR token are in the front line of this growing industry.