Maker is a platform which offers the Dai stablecoin and aims to provide services in the sectors of collateral loans, and decentralized governance. Based on ethereum blockchain, Maker is a smart contract platform that stabilizes the value of its stablecoin, Dai.
One of the biggest issues with your typical cryptocurrency is its volatility – it can rise tremendously out of the blue and fall dramatically when no one expects it to. Although the non-stable coins occasionally face rises and falls, one of the greatest unexpected rise of bitcoin occurred in the well-known era of December, 2017, when BTC rose to over USD $20,000 in just a few weeks, later to drop to USD $9,000 in late January. Volatility is a problem because it makes people reluctant in turning their savings and earnings to crypto.
Stablecoin was generated as a solution to this problem.
Maker offers the stablecoin DAI, which is pegged to the value of the U.S. dollar. It is also among the strongest stablecoins in the crypto space; it is at somewhat par with USDT (Tether) and TUSD (True). By this stablecoin, Maker is hopeful that it will “realize the full potential of blockchain technology.”
Maker enables anyone who leverages their ethereum assets to generate Dai on the Maker platform. Once generated, Dai can be used in the same manner as any other cryptocurrency: it can be freely sent to others, used as payments for goods and services, or held as long term savings. Importantly, the generation of Dai also creates the components needed for a robust decentralized margin trading platform.
What makes Maker different from other stablecoin platforms is its unique system of collateralized debt positions, autonomous feedback mechanisms, and incentivized external actors, all of which work to stabilize Dai.
In its whitepaper, Maker, mentions three procedures as the significant players behind its platform, these are: collateralized debt positions, autonomous feedback mechanisms, and incentivized external actors.
Maker uses its smart contracts, the collateralized debt positions (CDP) to generate Dai, meaning if one intends to generate Dai, they would have to sign a smart contract called the CDP. In order to do so, they would have to first and foremost deposit some digital assets as collateral. Once done, the CDP permits the user to generate Dai. However, generating Dai will put the user under debt. This debt effectively locks the deposited collateral assets inside the CDP. The collateral can be taken back later, by paying back an equivalent amount of Dai (to the collateral). It is also worth mentioning that CDPs are always initialized with an excess amount of collateral, i.e. the value of the collateral is always more than the debt.
Step 1: Creating the CDP and depositing collateral
The smart contract, CDP is created by making a transaction in Maker. A further transaction is made to fund it with the amount and define the type of desirable collateral.
Step 2: Generating Dai from the collateralized CDP
The CDP user makes a transaction to obtain a desirable amount of Dai, and in turn, the user is accrued of debt while the deposited collateral is locked into the CDP. The collateral at this point cannot be retrieved.
Step 3: Paying down the debt and the stability Fee
Whenever the users wish to retrieve their collateral, they must pay their debt in DAI, and a stability fee in MKR. The stability fee is accrued upon the debt overtime and can only be paid in MKR. The collateral in CDP becomes retrievable once the debt and the stability fee has been paid.
Step 4: Withdrawing collateral and closing the CDP
After the fees and the debt is paid for, the deposited collateral becomes entirely retrievable; it is now up to the user to retrieve it who can either retrieve the collateral completely or take back some of it. The retrieval is made to the user’s wallet.
Collateral Type – PETH
Maker accepts collateral of a specific type – PETH, also termed as Pooled Ether. To make a deposit of a collateral in Maker, one needs to have PETH. PETH is also easy to obtain, one just has to deposit ETH in a special smart contract, which gives the user an equivalent amount of PETH.
Initially, with the Single-Collateral Dai, user could only deposit only one type of collateral. However, Maker plans to upgrade to Multi-Collateral Dai, which will allow the system to accept multiple collateral types as deposits.
Feedback Systems – How Maker Stabilizes Dai?
There are four processes that stabilize the Dai coin:
i) Target Price – Calculates the collateral to debt ratio of the CDP, and determines the value of collateral assets Dai holders receive in the case of a global settlement.
ii) Target Rate Feedback Mechanism – This is used in the case of severe market instability; it breaks the fixed peg of Dai but maintains the same denomination.
iii) Sensitivity Parameter – Determines the target rate change in response to Dai’s target/market price deviation.
iv) Global Settlement – Used as a last resort to guarantee a target price to the holders of Dai; it shuts down and unwinds the Maker platform while ensuring that all users receive the net value of assets they are entitled to.
Maker has two coins – Dai and MKR. The former is a a stablecoin, the latter, not so. MKR is a utility coin that has two purposes: i) it is used in the payment of the stability fees that is accrued on the debt overtime, and ii) it is used as a governance token by MKR holders who vote for the risk management and business logic of the Maker system. Also, if CDPs become under collateralized perhaps due to market crashes, the MKR supply is diluted and sold off in order to raise enough funds to recapitalize the system.
There exists 1,000,000 MKR in total at the launch of Dai, with 530,000 MKR in market circulation. The number of MKR reduce as the MKR paid by the users as stability fees are burnt away.
Incentivized External Actors
Maker relies on three external parties to carry out operations. These include keepers, oracles and global settlers.
A keeper is an independent actor that is incentivized by profit opportunities. In Dai Stablecoin System, keepers take part in the debt auctions and collateral auctions when CDPs are liquidated. They also trade Dai according to the target price – they sell Dai when the market price is higher than the target price, and buy it when the market price is below the target price. This helps to maintain to the target price.
Oracles bring relevant information to the Maker platform. Maker requires real-time information about the market price of the assets held in collateral along with the information on the market price of Dai. It is essential for Maker to know about Dai’s deviation from the target price in order to adjust the target rate. This information is brought in by oracles who are chosen by the MKR voters and bring in information through ethereum transactions.
Global settlers are the last line of defense for the Dai Stablecoin System in the case of an attack. Global settlers are selected by MKR voters and have the authority to trigger global settlement.
Market of Dai
Our everyday cryptocurrencies fail to carry out normal everyday transactions. Free from volatility, the stablecoin, Dai has the following market options among many others.
1- Prediction Markets & Gambling applications
2- Financial Markets; Hedging, Derivatives, Leverage
3- Merchant Receipts, Cross-border Transactions and Remittances
4-Transparent Accounting Systems