A 3-Minute Complete Guide to Maker protocol and Dai
Maker protocol and Dai stand at the forefront of the decentralized finance (Defi) movement, a direct result of the many advantages that crypto and blockchain technologies bring to the financial services sector.
The Protocol provides a robust set of financial tools, while Dai, the most popular decentralized stable coin, unlocks the value inherent in those tools.
Together, the Maker protocol and Dai fuel a large and growing ecosystem of Defi projects that benefit users in numerous ways.
The attraction of the Maker Protocol and Dai
The maker protocol is the open-source platform through which anyone, anywhere can generate the Dai stable coin against crypto collateral assets.
This is a composable protocol because anyone can build on top of the protocol.
Whereas, Dai is a user-generated protocol.
Only Maker vault users can create it without the involvement of no third party.
It’s also decentralized, meaning users always have completely independent control over their Dai.
Finally, because it’s open-source, developers can integrate Dai into their projects.
What is the need?
Dealing with crypto’s volatility is a problem because predecessors of Dai which are tether, TrueUSD, and few others are at the risk of these projects is that the custodial party holding the real US dollars will refuse redemption of the stable coin for any regulatory reasons.
This goes against the ethos of crypto being permissionless.
Furthermore, we have to trust that the custodial solution actually has the correct amount of US dollars and not creating artificial inflation.
- Fast and low-cost transactions
- Borderless transfers
- Immutability and audibility.
Users of the Dai
People inside and outside the crypto sphere generate and/or buy Dai, and then use it or hold it for reasons ranging from curiosity to practicality.
Crypto enthusiasts, they offer to keep track of the latest developments in the Defi space and engage with the technologies they believe might become the solutions for what ails the global economy.
Crypto – curious, they start their Dai journeys by following the news of major corporations and central banks interested in launching their own stable coins.
Enterprises are also increasingly exploring Dai in various ways.
At one end of the spectrum, exchanges play important roles in the Defi ecosystem by listing the token and providing liquidity via their communities of traders.
At the other end are small- and medium-sized businesses that use Dai for everyday payments.
In the middle, fintech companies act as bridges between consumers and the blockchain by providing debit card integrations.
Dai-enabled debit cards, for example, allow users to spend Dai frictionlessly anywhere Mastercard or Visa are accepted.
Dai generators also use Oasis.app to deposit crypto collateral into a Maker Vault to create Dai.
Every Dai in existence was generated in this way.
People generate Dai to pay for goods and services in a stable currency without having to sell their underlying collateral assets like ETH, wBTC, etc.
Who controls the system?
MKR token allows token holders to influence certain aspects of the protocol such as :
What should be the stability fee?
How much collateral should be backing each CDP (collateralization ratio)?
Emergency shutdown? – Shutting down the protocol in the case of a flash crash of the price of Ether or any other unforeseen situation.
Maker protocol and Dai are like a credit facility that issues loans with a certain interest rate.
If the interest rate (stability fee) is low, people are encouraged to borrow more (more ETH).
If the interest rate is high, the cost of capital is high making it less attractive to borrow.
MKR holders voted to increase the stability fee from 1% to 3.5% in hopes that it reduces the incentive to open CDP (and close existing CDPs) to increase the buying pressure.
In the future, the Maker team plans to introduce the Dai Savings Rate, which will allow DAI holders to lock up their DAI and earn interest.
The interest paid to holders is financed from the stability fee that currently goes to purchase and burn MKR.
Multi – Collateral Dai
Maker protocol and Dai is one of the finest experiments.
The only difficulty it faces is the limitation of using only Ether to collateralize your CDPs.
With the introduction of multi – collateral Dai, ERC -20 tokens are used to collateralizing the CDP.
Wrapped bitcoin could be used to collateralize the CDP.
While it all sounds good there are two implications which Maker user should be aware of :
- Using custodial assets such as wrapped Bitcoin (backed by BitGo) could result in undercollateralized CDPs if issuers are forced to freeze assets.
- Since Ethereum isn’t the only asset inside the collateral, it means that any positive feedback loops from the ETH price can’t be realized as there’s less ETH to actually contribute.
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What is Dai coin?
Dai is a fully collateral-backed currency whose value is kept stable relative to the US Dollar through a series of competing financial incentives.
Is Dai A Stablecoin?
Dai is a stable coin representing a fundamentally new solution to this problem making it suitable for a wide range of financial activities.
Is Dai worth buying?
Dai is always going to be worth around $1usd, it’s perfect as a currency.
Dai will only raise its value in the future.
What is Dai backed by?
Dai is backed by Ethereum cryptocurrency locked in publicly viewable contracts that are stored on the blockchain.
Many stable coins are trusted because their value is underpinned by central bank currencies.
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