MakerDAO: What Is It And How It Helps Crypto Assets?

Volatility is the most prominent feature of cryptocurrencies and crypto-assets. The enormous price fluctuations of cryptocurrencies and crypto-assets typically cause many people to be concerned about mainstream crypto adoption. The vast price volatility of cryptocurrencies and crypto-assets significantly hinders borrowing them. As a result, solutions like MakerDAO have impacted the crypto world considerably.

It’s become a vital response to concerns about the amount repaid on crypto-assets loans. Is it a crypto loan site, then? To describe how MakerDAO operates and supports numerous features, you’d need more than simply a “crypto platform.” The following talk will comprehensively explain the new decentralized platform explicitly designed for crypto-based lending and borrowing.

What exactly is MakerDAO?

The most apparent entry at the start of a MakerDAO discussion would be its definition. It is a decentralized or peer-to-peer organization focused on developing technology to support crypto assets savings, borrowing, and lending functions, as well as a stable coin on the Ethereum blockchain network. Anyone having ETH (Ether) and a Metamask wallet can participate in lending and borrowing through the MakerDAO crypto protocol.

Also, read – The DAO crypto is a big idea for 2022, and it’ll shake up many businesses

Surprisingly, you may use the platform to lend yourself money in the form of the stable cryptocurrency DAI. To create a certain amount of DAI, users must lock a certain amount of ETH in the MakerDAO or MKR protocol’s smart contracts. You will essentially have to pay ETH as a collateral crypto asset for DAI loans.

The peer-to-peer lending, borrowing, and savings protocol’s promising features pique curiosity even more. If you want your ETH back from the platform, you must repay the loan and any other expenses you paid during the procedure. 

MakerDAO’s backstory

The background of the protocol would be the next significant highlight in a comprehensive account of MakerDAO. You need to know what prompted the creation of such a unique methodology. The decentralized lending platform is one of the first projects in the DeFi space, which is interesting. Rune Christensen, the platform’s founder, is now the platform’s CEO. In 2018, it also received a $15 million investment from venture capital firm Andreessen Horowitz. Where did all of this begin?

The approach for lending and borrowing crypto assets on a blockchain is the central concept for developing a platform like MakerDAO. In a trustless system, one would adequately wonder how borrowing works on the blockchain without any credit checks. Liquidity, which refers to transforming an asset into capital, is frequently the apparent option in such situations.

Liquidity was introduced to crypto-assets lending and borrowing through the MakerDAO crypto protocol. On the blockchain, you can see how liquidity and the danger of liquidation promote stability in lending and borrowing. For example, when the collateral value for a given loan, such as ETH, has fallen significantly below the amount of the loan in DAI, the loan is liquidated. As a result, the platform can sell ETH as collateral to repay DAI loans, fees, and penalties.

MakerDAO’s Operation

The MakerDAO protocol has seen a significant increase in popularity in recent months. It is, in fact, one of the most widely utilized and long-running projects in the DeFi ecosystem. 

You’ve probably figured out that the MakerDAO platform is essentially a crypto loan and borrowing solution by now. The protocol consists of smart contracts that have been deployed on the Ethereum blockchain. The Maker protocol aids in the facilitation of crypto loans secured by borrowers’ collateral.

On the other hand, the Maker protocol uses a different type of collateral than traditional loans, namely currency. On the other hand, users must take out loans against a variety of crypto pairings supported by the system. For example, in an ETH/DAI crypto trading pair, you can borrow DAI in exchange for ETH.

Borrowers essentially place crypto assets collateral in smart contracts. In reality, all of the terms for arranging and administering crypto loans on the MakerDAO crypto lending protocol are dictated by Ethereum smart contracts. On top of that, The Maker Foundation is in charge of the Maker protocol, which allows for complete ownership transfer of crypto assets. Most importantly, the Maker Foundation assists in implementing the Maker protocol’s features as a fully decentralized autonomous organization, or DAO.

MakerDAO’s Tokens

Governance is a prominent feature when discussing the “how does MakerDAO operate” of a Decentralized Autonomous Organization, or DAO. How can decentralization be guaranteed when the Maker Foundation controls the Maker protocol? This is where you should be aware of the MakerDAO platform’s tokens, namely DAI and MKR. Both tokens are integral parts of the protocol and perform critical functions.

DAI

First and foremost, the DAI token is a stable cryptocurrency tethered to the US dollar. It acts as a conduit for borrowers to obtain loans against collateral posted on the platform. DAI’s operations are heavily influenced by supply and demand movements.

MKR

The MKR token is a necessity for providing liquidity in the MakerDAO cryptosystem. The platform may easily manage difficulties originating from the buildup of bad debts using the MKR token. The MKR token is used for various protocol functions, including governance.

The protocol mints and sells MKR tokens. MKR tokens provide governance powers to users, allowing them to control the platform’s evolution. Furthermore, MKR token holders are typically borrowers’ final resort if the collateral is insufficient to repay the quantity of DAI loans in circulation.

Crypto Assets are used as collateral

The subject of “how does MakerDAO work” also raises the issue of appropriate collateral assets. DAI created on the platform heavily relies on collateral assets held in the protocol’s Maker Vaults. The DAI is also backed by collateral assets, which ensures its stability. In other words, collateral support is any digital asset declared acceptable for the protocol by MKR token holders.

With the agreement of MKR holders, the Maker protocol would accept any Ethereum-based asset. Additionally, MKR token holders will be required to approve specified risk factors in each authorized collateral.

Vaults of the Makers

Maker Vaults are another critical aspect of MakerDAO’s operation that has been thoroughly detailed. You’ve probably heard a lot about acquiring crypto loans by depositing collateral in smart contracts on the Maker system. The Maker Vaults in the protocol are essentially smart contracts that assist in leveraging all of the protocol’s supported collateral assets to generate DAI.

Users can access maker protocol to create Maker Vaults. You can take advantage of various user interfaces, network access portals, and other community-developed interfaces. The procedure of building Maker Vaults is straightforward, albeit there are a few minor difficulties, such as responsibilities to repay DAI and stability fees for freeing assets secured in the vaults.

Maker Vaults are designed to be non-custodial are the next important element of the MakerDAO platform. As a result, users can directly engage with Maker Vaults and the protocol. Unless the collateral value falls below a specified minimum level, all users have complete and independent authority over the collateral they have locked in the protocol.

MakerDAO External Agents at Work

MakerDAO’s decentralized crypto lending platform is demonstrated through the smart contract infrastructure in the Maker protocol and Maker vaults. On the other hand, the Maker protocol’s operation entails more than smart contracts. The Maker protocol relies on external actors to keep its operations running. The external actors who support the MakerDAO ecosystem and their value to the platform are listed below.

Keepers is an autonomous agent in the Maker protocol who is compensated for providing liquidity through arbitrage opportunities.

Oracles of Price

The MakerDAO crypto protocol uses a decentralized oracle infrastructure to get real-time information on the market pricing of Maker Vault collateral assets. Price Oracles are critical in assessing when appropriate to liquidate a company.

Oracles in Case of Emergency

The Emergency Oracles in Maker protocol is a last-ditch defense against attacks on the platform’s governance or other oracles.

The DAO Teams Maker protocol also hires DAO teams, including individuals and service providers, to ensure governance. Members of DAO teams are interestingly independent market actors, which adds credibility to the protocol’s authority.

MakerDAO Use Cases

Any discussion of MakerDAO and its capabilities would undoubtedly conclude with a discussion of its applications. Crypto lending functionality is one of Maker protocol’s most apparent use applications. The Maker system and its stablecoin DAI provide a valuable foundation for the creation of alternative DeFi protocols.

Reminder set for this Thursday ✅ Let’s talk stablecoins & their impact with @nad8802 & @hexonaut repping $Dai @MakerDAO 🤗
Thanks for hosting @dabit3 https://t.co/PuaKkJ2jCB

— Lenkla Hu⬙kova (lenklah.eth) (@LenklaH) March 8, 2022

DAI stablecoin is used by global organizations like UNICEF to raise funds for blockchain-based open-source initiatives in social projects. Uniswap and Outlet are two other significant practical DeFi applications supported by the Maker ecosystem.

Furthermore, the gaming industry applications of MakerDAO can aid in the generation of tokenized in-game assets. The portal also aims to promote DAI in the art industry by offering artists incentives to trade their artwork as NFTs.

Conclusion

The Maker protocol addresses one of the long-standing concerns with borrowing and lending on blockchain networks by delivering liquidity. The central notion of the MakerDAO crypto lending platform’s foundations provides excellent long-term growth possibilities. At the same time, the Maker protocol benefits significantly from the assurance of confidence offered by smart contracts.

The Maker system places control in the hands of users through the use of two unique tokens, DAI and MKR. Furthermore, the focus on DAO and external agents is a significant factor for bolstering the Maker protocol’s chances. Right now, start learning more about the protocol and how it works in practice.