MakerDAO stands as one of Ethereum's most iconic DeFi projects. Founded by Rune Christensen, its origins trace back to the Bitshares era, where early explorations into stablecoin mechanisms began. Even before Ethereum's launch, Christensen had already conceptualized DAI's framework. Launched in 2017, MakerDAO emerged as a pioneering lending protocol. While many projects from the 2017-2018 bull run faded away, DAI remains one of the most trusted stablecoins—proof that Maker's infrastructure has stood the test of time.
What Is DAI?
DAI is MakerDAO's flagship product: a USD-pegged stablecoin. Unlike centralized alternatives (e.g., Tether), DAI is algorithmically stabilized through overcollateralized loans. Initially, only Ethereum (ETH) could be used as collateral. Borrowers locked ETH into a vault and minted DAI against it.
How DAI Works: Synthetic Asset Creation
A common misconception is that DAI "backs" pre-existing assets. In reality, DAI is created from nothing during borrowing:
- A borrower deposits ETH into a Maker Vault.
- The protocol mints new DAI (e.g., 750 DAI for 1 ETH at 150% collateralization).
- When the loan is repaid, the DAI is burned, and the collateral is released.
This mirrors traditional fractional-reserve banking, where loans create new money. DAI holders effectively hold debt claims against borrowers, who must eventually buy back DAI to reclaim collateral. Thus, DAI is a synthetic asset, and MakerDAO is more accurately a synthetic-asset protocol.
Key Mechanisms of MakerDAO
1. Collateralization & Liquidation
- Collateral Ratio: Minimum 150% (e.g., 1 ETH worth $1,500 backs 1,000 DAI).
Liquidation: If ETH falls below $1,125, the vault is auctioned at a discount.
- Proceeds cover the debt + 15% penalty; excess ETH returns to the borrower.
- 👉 Learn how liquidations protect DAI’s peg
2. Stability Fee (Interest Rate)
- Adjustable by MKR token holders via governance votes.
- If DAI < $1: Raise fees to reduce supply (discourage borrowing).
- If DAI > $1: Lower fees to incentivize minting.
3. Multi-Collateral DAI (2019 Update)
- Expanded beyond ETH to include WBTC, USDC, etc.
- Introduced DAI Savings Rate (DSR): Earn interest by staking DAI.
Black Thursday & Maker’s Resilience
In March 2020, ETH prices crashed 50% in hours. Many vaults were liquidated, but auctions failed due to network congestion. Some DAI became undercollateralized. MakerDAO responded by:
- Using Maker Buffer (protocol reserves) to cover gaps.
- Auctioning MKR tokens to recapitalize the system (diluting holders but restoring solvency).
👉 Explore how MakerDAO handles crises
Why Is MakerDAO Called "DeFi’s Federal Reserve"?
- Monetary Policy: Adjusts DAI supply via interest rates (like central banks).
- Decentralized Governance: MKR holders vote on critical parameters.
- Stability Without Trust: No reliance on centralized entities.
FAQs About MakerDAO
1. Is DAI really decentralized?
Yes—its peg is maintained algorithmically, not by a company.
2. What happens if ETH crashes to zero?
The system would use MKR auctions to cover debts, but this is extremely unlikely.
3. How do I earn yield with MakerDAO?
- Borrow DAI (pay stability fees).
- Stake DAI in the DSR for passive income.
4. Who controls MakerDAO?
MKR token holders vote on proposals via decentralized governance.
Conclusion
MakerDAO’s ingenious design blends monetary policy, collateral engineering, and decentralized governance. As DeFi’s "Fed," it proves that trustless, algorithmic systems can rival traditional finance.
For deeper insights, check our DeFi 101 guide 👉 here.