The world of cryptocurrencies sometimes seems too complicated and illogical for the average person. And the only way to understand its complexities and to find acceptable ways to get involved or invest in this sphere is through training.
In this article, we have prepared information to help us understand the nature and the main subtleties of one of the most unique and promising crypto-world projects – Maker DAO.
What is the Maker DAO project, how it works, and why do many experts believe its approach can be the key to the success of the cryptocurrency market? You will learn the pros and cons, the project’s hacks, and attempts to withdraw community funds.
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General information on Maker DAO
|Maker DAO native token||MKR|
|Official social networks||Twitter, Reddit, Telegram, YouTube, Discord|
|Where token traded||Uniswap, PancakeSwap, dYdX|
What is MakerDAO?
The project is based on the Ethereum blockchain and allows users to lend and finance other community members through smart contracts.
In other words, Maker DAO is a platform for decentralized financial services where everyone can become both a lender and a borrower.
History of Maker DAO
Maker DAO was founded in 2015 by Rune Christensen, an experienced cryptocurrency developer and entrepreneur. Rune encountered a problem that affected many users of the crypto world: the high volatility (i.e., fluctuations in value) of cryptocurrency assets.
This problem makes the crypto world less attractive to a wide range of users and large investors, as their funds can vanish in the blink of an eye if the value fluctuates drastically.
Recognizing this need for stability, Rune and his team decided to create a system that allows people to use the benefits of cryptocurrencies (like fast and secure transactions, decentralization, and accessibility) while eliminating their main drawback – volatility. Thus was born the idea of Maker DAO – a decentralized autonomous organization that aims to create a stable cryptocurrency instrument.
The project was built on the Ethereum blockchain. Maker DAO proposed the idea of a two-token model: a management token called MKR and a stablecoin called DAI.
- MKR allows you to manage the platform and participate in votes on essential project development issues.
- DAI is a stable cryptocurrency tied to the U.S. dollar, which seemed like the perfect solution to combat volatility.
That’s how Maker DAO evolved from a simple idea into a functional platform for decentralized financial services that successfully solves old problems and opens new horizons for millions of crypto-enthusiasts.
Key features of the MakerDAO project
Let’s look at the key points that set Maker DAO apart from other projects and see who is behind its support as investors.
Here are some of the fundamental features and reasons for its popularity:
- Two-token model: One of the main features of Maker DAO is using a two-token model. This means two cryptocurrencies are operating within the project. The MKR token plays a management and governance role, while the DAI stablecoin provides stability and protection against volatility spikes by pegging to 1 US dollar.
- Collateralized Debt Positions (CDPs): MakerDAO’s system allows users to generate Dai by locking up collateral in CDPs. These CDPs serve as a mechanism to create and manage leverage while maintaining the stability of the Dai stablecoin.
- Decentralized governance: The project operates on a decentralized governance model, where holders of the project’s native token, MKR, have voting rights. This enables token holders to propose and vote on changes, improvements, and risk management strategies within the MakerDAO ecosystem.
- Collateral diversity: DAO accepts a variety of crypto assets as collateral for generating Dai, providing flexibility and broadening the range of potential users. This allows users to leverage their crypto holdings without selling them, unlocking liquidity while maintaining exposure to their underlying assets.
- Risk management mechanisms: MakerDAO has implemented several risk management mechanisms to ensure the stability and security of the system. These include liquidation mechanisms that automatically liquidate CDPs when the collateral value falls below a specified threshold and the use of MKR token holders’ debt auctions to recapitalize the system in case of under-collateralization.
- Integration with DeFi ecosystem: The platform is widely integrated with other DeFi protocols and applications. It is often used as a foundational element in various DeFi strategies, such as yield farming, decentralized lending, and decentralized exchanges, further enhancing its utility and popularity.
- Pioneer of DeFi: MakerDAO is considered one of the pioneers of the DeFi movement. Its innovative approach to stablecoins and decentralized governance has inspired and influenced the development of numerous other DeFi projects and protocols.
These essential features and its role as a foundational pillar of the DeFi ecosystem have contributed to MakerDAO’s popularity and unique position as a leading decentralized autonomous organization in the crypto industry.
Investors and project funding
It is also worth noting that Maker DAO attracts attention and investment from major market players and blockchain enthusiasts.
According to Crunchbase, MakerDAO, a prominent decentralized organization in decentralized finance (DeFi), has secured significant funding amounting to $79.5 million through seven funding rounds. The most recent round (Series Unknown) was concluded on April 30, 2020, further strengthening the project’s financial standing and growth prospects.
Throughout its funding journey, the project has garnered support from a diverse group of 23 investors who have played a crucial role in its development. Among the main investors of the project, there are well-known funds such as Polychain Capital and Andreessen Horowitz.
By attracting such a range of investors and accumulating substantial funding, MakerDAO has solidified its position as a leading player in the DeFi landscape, enabling the project to continue its mission of revolutionizing decentralized finance and empowering users worldwide.
Maker DAO hacks
Despite all the innovation and benefits of the crypto world, it should not be forgotten that certain security issues remain open in many projects (since the DAO hack). And Maker DAO has faced hacking and fraud attempts at one time too.
Let’s examine the most famous cases and determine how they affected the project’s development.
In March 2020, during the market crash, many platforms, including Maker DAO, were caught by “Black Thursday,” or the collapse of financial markets. As a result of the fall in the value of cryptocurrencies, a huge number of pledged DAI positions became insufficiently collateralized and had to be liquidated through auctions. Due to network congestion on Ethereum and the frantic demand for a stable DAI token, many auctions were won for zero DAI, meaning the loss of collateral for borrowers.
Thanks to a quick community response and the introduction of new smart contracts – the Maker DAO team was able to rebuild the system and make changes to ensure that the same thing will not happen again.
In December 2020, the project’s official blog reported a vulnerability in older versions of Maker smart contracts. The problem, found by experts in the test code, potentially allowed an attacker to cheat the system and bail out any crypto-enthusiast without repaying the debt.
However, the Maker DAO team has been actively working on fixing the problem, and even before the vulnerability was announced, most users had switched to the new version of the contracts. No real case of an attack using this vulnerability has been seen, demonstrating the team’s vigilance and proactivity in ensuring the security of its customers.
Security and hacking protection are extremely important issues for any cryptocurrency project, especially in the DAO industry.
Although Maker DAO has faced some problems in this area, it is important to note that none of the attacks have resulted in major financial losses or project collapse.
MKR native token and DAI stablecoin
When we talked about the key features of Maker DAO, we mentioned the two-token model, which involves using a native MKR and a DAI stablecoin. Understanding the basics and functionality of these two tokens will help newcomers better understand how the platform works and their role in the cryptocurrency market.
Let’s start with the native MKR token. It is a utility token whose main purpose is to manage the decentralized autonomous organization Maker DAO.
- MKR holders can participate in votes on various issues related to the development and management of the project. This can include changes in commissions, fees, approval of new pledged assets, or support for new features.
MKR holders also receive commissions for providing financial services on the platform. These are usually paid as DAI Stablecoin, supporting its value.
- Now let’s move on to DAI stablecoin. It was designed as a stable cryptocurrency pegged to the U.S. dollar at 1:1. DAI aims to provide a stable value amidst the volatile cryptocurrency market, making it attractive for users to transfer and store value.
To keep DAI stable, using smart contracts, each token unit is collateralized by other cryptocurrencies, such as Ethereum or Bitcoin.
DAI plays a critical role in the Maker DAO ecosystem: this token provides loans, liquidates collateral positions, and pays fees on the platform.
Maker DAO investors rely on the stability of DAI and manageability of MKR, showing the ability to have a significant market share in the cryptocurrency world.
Pros and cons of the Maker DAO
- The stability of the DAI exchange rate, which makes it attractive for use as a means of payment and a funding tool;
- Community participation in project management through a native MKR token;
- Security and transparency through the use of Ethereum smart contracts;
- Decentralization and accessibility of financial services to a wide range of crypto-enthusiasts and non-crypto-world people.
- Difficulty understanding how the project works for newcomers;
- Some risks associated with dependence on the Ethereum blockchain (e.g. high cost of commissions).
If you look at the entire DAO industry, you can say that Maker DAO is a unique organization.
Why? It’s simple enough. In addition to the issues of decentralized community management and the prospects of the entire crypto industry, the Maker DAO team has taken care of volatility issues, thanks to the DAI stablecoin.
And this is a very attractive bonus for large capital and its transition (at least partially) to the crypto world.