Overview of MakerDAO and its lending ecosystem powered by DAI.
MakerDAO provides a decentralized protocol - Maker Protocol - that allows users to generate and borrow the Dai (DAI) stablecoin. MakerDAO’s vision for Dai is a decentralized, unbiased, collateral-backed cryptocurrency that is soft-pegged to the US Dollar, providing stability that gives individuals and businesses confidence to operate with digital assets.
Users of the Maker Protocol can deposit Ethereum-based assets into a Vault to borrow Dai. The deposited assets are locked and cannot be retrieved unless the user repays the borrowed Dai and a fee. Dai can be generated from a Vault, bought from brokers or exchanges or received as payment, this effectively means that Dai can be used in the same way as any other cryptocurrency.
Key Features of Maker Protocol
- Over-collateralized borrowing of Dai
- Maker Vaults, smart contracts that accept Ethereum-based assets as collateral
- Stability Fee, an annual percentage yield that accrues on borrowed Dai
- Dai Savings Rate (DSR)
What is over-collateralized borrowing?
In the Maker Protocol, users are expected to deposit assets into the protocol to use as collateral when they plan on borrowing Dai. For a borrower, the value of the collateral provided must be higher than the value of the Dai borrowed, otherwise the borrower risks liquidation of their collateral.
When compared to other lending protocols, in Maker, users can also participate in “markets” for specific collateral types. Depending on the type of risk and exposure that a user is comfortable with, a market provides different fees and collateral ratios. For example, just for WETH, there are the ETH-A, ETH-B and ETH-C markets for borrowing Dai. A physical world analogy would be real-estate mortgages, which come with different rates and risk profiles for the borrower.
Maker Vaults
Each collateral asset requires its own Vault, which means a depositor can have many Vaults within Maker Protocol. Subsequently each collateral asset and its associated Vault will have their own collateral-to-debt ratio i.e. Liquidation Ratio. While the Maker Protocol does accept Ethereum-based assets as collateral, each asset must be approved by the protocol’s governance committee, which also denotes Risk Parameters for each collateral. A collateral’s Risk Parameters will affect its Liquidation Ratio.
Liquidation of Vaults ensures that the entire protocol remains solvent and is able to cover the total outstanding debt in the Maker ecosystem i.e. the amount of borrowed Dai which needs to remain soft-pegged to the US Dollar.
Stability Fee
Besides being an annual percentage fee on top of the Dai borrowed from a Vault, the Stability Fee can only be repaid in Dai.
What is the Dai Savings Rate?
Any user holding Dai can also earn savings by locking their Dai into the Dai Savings Rate (DSR) smart contract. There is no minimum deposit and users can withdraw any or all of their Dai from the contract at any time. Earnings are based on the Variable Savings Rate which is determined by the protocol’s governance.
Maker Protocol and Governance
Holders of the MKR token can participate in the governance of the protocol by voting on new proposals, addition of new assets, modification of collateral Risk Parameters, modification of the Dai Savings Rate and upgrades to the protocol.