What is MakerDAO (MKR)?

What is MakerDAO (MKR)

MakerDAO is software running on Ethereum that aims to encourage a distributed network of computers to maintain the DAI, a cryptocurrency designed to track the price of the US dollar.

One of several emerging decentralized finance (DeFi) cryptocurrencies, the MakerDAO is part of a larger system called the Maker protocol, which uses a combination of cryptoactives to operate and maintain the DAI without the need for any banks or government.

Specifically, the MakerDAO protocol requires two types of Tokens to work: DAI and MKR.

The DAI is created when a user locks another cryptocurrency, such as ETH, on the Maker platform to borrow from the DAI.

Users can return the borrowed DAI to claim this cryptographic currency, but they must be careful that its value does not fall below a certain level or it can be automatically sold.

But while the DAI is best regarded as the service provided by the Maker Protocol, MKR, it is the cryptoactive that governs how the software changes that keep the DAI running.

In short, MKR tokens allow users to vote on proposals that affect how the DAI can be used.

For example, MKR token holders can vote on which cryptocurrencies can be locked in the protocol or on the price at which those assets would be sold in liquidation.

As of 2020, the Maker Protocol accepts eight cryptocurrencies including ETH, MANA and BAT that can be used to generate DAI.

Who Created MakerDAO?

What is MakerDAO (MKR)

The Maker Protocol was created in 2015 by a group of developers led by Rune Christensen. The group was later formalized into the Maker Foundation, a Cayman Islands company.

In 2017, the Maker team raised $12 million from the sale of MKR tokens to notable venture capital firm Andreessen Horowitz and others. This included the Polychain Capital cryptocurrency fund and other venture firms such as 1Confirmation.

In 2018, another $15 million in MKR tokens were sold to Andreessen Horowitz. The company said at the time that it intended to participate in MakerDAO by helping to administer the DAI system.

Maker raised another $27,5 million in 2019 from venture firms Paradigm and Dragonfly Capital Partners for expansion into Asia.

Why Does the Maker (MKR) Have Value?

The MKR must accumulate value as the use of the Maker Protocol increases, because the MKR provision is reduced when the system is working well and increased when it is poorly governed.

It is noteworthy that for investors, however, there is no limit to the total number of tokens that can exist. MKR tokens are created or destroyed in two scenarios, which are controlled by auctions.

If the Maker system is working as expected, it should charge fees from users who block cryptocurrencies on the system to generate DAI.

Surplus Auctions

Once the fees charged exceed a certain amount, defined by the MKR holders, the Maker system conducts an auction to sell the extra DAI. This extra DAI must be purchased with MKR. This process is known as Surplus Auction.

When the auction ends, the MKR is destroyed, reducing the total MKR supply. A reduced MKR offer increases the price of the token.

Debt Auctions

On the other hand, if things are not going well, and the locked coins are sold for less than their previous value, then the Maker system needs to raise funds through a Debit Auction.

The Debt Auction sees new MKR tokens created by the system and then auctioned off to the DAI. This type of auction increases the total supply of MKR chips, thus reducing the price.

MKR token holders are therefore motivated to ensure that the MKR system runs smoothly so it can generate more user fees, thus reducing the supply of MKR tokens.

If MKR token holders vote unreasonably, this can lead to blocked coins being automatically sold at low prices, leading to an increase in the supply of MKR tokens.

How Does MakerDAO Work?

At launch, 1 million MKR tokens were created to control the Maker protocol.

Anyone with these MKR tokens can vote on key decisions using a process known as Executive Voting.

If an Executive Vote is approved, the code in the Manufacturer's Protocol is changed to reflect the winning proposal.

However, before an Executive Vote can be taken, another form of voting must take place first. This is called a Proposal Survey and is a way for MKR holders to gauge sentiment about a proposal before committing to any changes to the software.

A third type of vote can be cast by non-MKR holders using threads in the MakerDAO forum.

But while anyone can make proposals to the MakerDAO, only MKR holders can vote on them. A vote is then measured by the number of MKR tokens committed to a proposal.

For example, if 10 holders with 1.000 MKR vote for Proposal A, while 5 holders with 5.000 MKR vote for Proposal B, then Proposal B wins because more MKR tokens support it.

Only the number of tokens, not the number of token holders, influences the result of the vote.

DAI Savings Rate

Importantly, MKR holders can decide how much DAI holders earn if they save DAI on the platform. The amount DAI holders earn for doing this is known as the DAI Savings Fee.

The DAI Savings Rate has been as high as 8,75% per annum and as low as 0%. In fact, the current savings rate is fixed at zero due to a market crash in March that caused the DAI to trade significantly above $1.

In the aftermath of the crash, MKR holders voted to set the DAI savings rate to 0% to encourage the sale of the DAI, which would bring the DAI price closer to $1.

In this case, MKR holders voted in line with expectations.

When the DAI price rises above $1, MKR holders must vote to lower the savings rate to reduce demand, causing the price to fall.

If the DAI price is below a dollar, MKR holders must vote to increase the savings rate to increase demand to maintain the DAI, causing the price to go up.

Why Use MakerDAO (MKR)?

If you want to play a role in determining important decisions about how the Maker protocol operates, then you'll want to use MKR.

The more MKR you have, the more you can tell which ones criptomoedas are used in the protocol or which real assets can be used to generate DAI.

Investors may consider purchasing MKR if they want to expose themselves to increased adoption of the protocol.

If the Maker protocol becomes widely used (and remains well-executed), MKR tokens can become a valuable addition to a portfolio of cryptoactive.

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