{"id":30850,"date":"2022-03-04T00:30:49","date_gmt":"2022-03-04T04:30:49","guid":{"rendered":"https:\/\/101blockchains.com\/?p=30850"},"modified":"2023-11-08T04:05:25","modified_gmt":"2023-11-08T08:05:25","slug":"makerdao","status":"publish","type":"post","link":"https:\/\/101blockchains.com\/makerdao\/","title":{"rendered":"What is MakerDAO and How it Works"},"content":{"rendered":"

The foremost highlight in the domain of cryptocurrencies<\/a> and crypto-assets is volatility. Continuous fluctuations in the price of cryptocurrencies and crypto-assets on a massive scale often lead to many concerns regarding mainstream crypto adoption. The massive price fluctuations of cryptocurrencies and crypto assets present formidable setbacks for borrowing such assets. As a result, solutions such as <\/span>MakerDAO have been making a formidable impact on the crypto sphere.<\/span><\/p>\n

It has evolved as a crucial answer for doubts about the repayable amount on crypto loans. So, it is a crypto lending<\/a> platform? You would need more than just a \u201ccrypto platform\u201d for explaining <\/span>how MakerDAO works and serves different functionalities. The following discussion will offer you a detailed overview of the new decentralized platform tailored for crypto-based lending and borrowing functionalities.<\/span><\/p>\n

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What is MakerDAO?<\/b><\/h2>\n

The obvious entry at the beginning of a discussion on <\/span>MakerDAO would refer to its definition. It is basically a peer-to-peer<\/a> or decentralized organization<\/a> focused on developing technology to facilitate savings, borrowing, and lending functionalities along with a stable cryptocurrency on the Ethereum blockchain<\/a> network. The <\/span>MakerDAO crypto protocol allows any individual with ETH (Ether<\/a>) and a Metamask<\/a> wallet to participate in lending and borrowing.\u00a0<\/span><\/p>\n

Interestingly, you can lend yourself money in the form of the stable cryptocurrency, DAI, on the platform. Users have to lock a certain amount of ETH in the smart contracts<\/a> of <\/span>MakerDAO or MKR protocol for creating a specific amount of DAI. Basically, you will have to pay ETH as collateral for DAI loans.\u00a0<\/span><\/p>\n

If you want to unlock your ETH from the platform, you need to pay back the loan alongside other fees incurred in the process. The promising functionalities of the peer-to-peer lending, borrowing, and savings protocol fuel further interest in it. Doesn\u2019t it remind you of DeFi<\/a> solutions?<\/span><\/p>\n

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Background of MakerDAO<\/b><\/h3>\n

The next significant highlight in an account of <\/span>MakerDAO explained comprehensively would be the background of the protocol. You need to understand what exactly drove the origins of such a unique protocol. Interestingly, the decentralized lending platform is one of the first projects in the DeFi space. The platform\u2019s founder, Rune Christensen, is currently the CEO of the platform. It also successfully garnered an investment of $15 million from venture capital firm Andreessen Horowitz in 2018. Where did all these start from?<\/span><\/p>\n

The basic premise for introducing a platform like <\/span>MakerDAO revolves around the approaches followed for lending and borrowing on the blockchain<\/a>. One would reasonably wonder how borrowing works on the blockchain without any credit checks in a trustless environment. In such cases, the obvious answer often points towards liquidity, which implies the possibility of converting an asset into capital.\u00a0<\/span><\/p>\n

The <\/span>MakerDAO crypto protocol introduced the benefit of liquidity in crypto lending and borrowing. For instance, when the collateral for a specific loan, i.e., ETH, has dropped in value by a considerable margin below the amount of the loan in DAI, the loan goes through liquidation. Therefore, the platform can sell off ETH collateral for paying loans borrowed in DAI<\/a> alongside the fees and penalties. You can notice how liquidity and the threat of liquidation ensure stability in lending and borrowing on blockchain.<\/span><\/p>\n

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Working of MakerDAO<\/b><\/h2>\n

The popularity of the <\/span>MakerDAO protocol has doubled up considerably in recent times. As a matter of fact, it is one of the most commonly used and longest-running projects in the DeFi ecosystem. The protocol has almost 2.3 million ETH locked in it, which accounts for a significant share of total ETH supply. Therefore, anyone would wonder about <\/span>how MakerDAO works and its components to understand why it is special.\u00a0<\/span><\/p>\n

As of now, you must have understood how the <\/span>MakerDAO platform is basically a crypto lending and borrowing solution. The protocol includes a combination of smart contracts deployed on the Ethereum<\/a> blockchain. The Maker protocol helps in facilitating the crypto loans against collateral placed by borrowers.\u00a0<\/span><\/p>\n

However, the collateral in the case of Maker protocol differs from that used in traditional loans, i.e., cash. On the contrary, users have to borrow loans against multiple crypto pairs supported by the protocol. For example, you can borrow DAI in return for ETH in an ETH\/DAI crypto trading pair.\u00a0<\/span><\/p>\n

Borrowers basically deposit the collateral in smart contracts. As a matter of fact, Ethereum smart contracts<\/a> dictate all the terms for facilitating and managing crypto loans on the <\/span>MakerDAO crypto lending protocol. On top of it, The Maker Foundation controls the Maker protocol for facilitating complete transfer of ownership of crypto assets. Most important of all, the Maker Foundation helps in realizing the functionalities of the Maker protocol as a completely Decentralized Autonomous Organization<\/a> or DAO.\u00a0<\/span><\/p>\n

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Tokens of MakerDAO<\/b><\/h3>\n

Speaking of a Decentralized Autonomous Organization or DAO in identifying \u201c<\/span>how does MakerDAO work,\u201d<\/b> governance would emerge as a prominent highlight. What is the assurance of decentralization<\/a> when the Maker Foundation exerts control over the Maker protocol? This is where you need to take note of the tokens on the <\/span>MakerDAO platform, i.e., DAI and MKR. Both the tokens are core components of the protocol and serve essential functionalities.\u00a0<\/span><\/p>\n