User:JessSalomon-Maker/MakerDAO

Stablecoin

MakerDAO is the name of organization carrying out the Maker project. The Maker project is dedicated to the creation of stablecoins. The term ‘stablecoin’ refers to an asset with price stability. In order for a digital currency to effectively transfer value it is expected that the price of currency itself is stable and not subject to price volatility. Stablecoins make commerce possible by providing buyers and sellers a reliable, stable store of value for transactions. The recent and rampant volatility in Bitcoin, Ethereum and many altcoins magnifies the need for a stablecoin.

MakerDAO consists of three essential parts: Dai (the stablecoin), CDP’s (Collateralized Debt Positions that create the stablecoin’s safe backing) , and MKR (the system’s utility/governance token).

Dai

MakerDAO’s stable coin is called Dai. Dai is rooted in a chinese term that transliterates “to give” or “to loan”. Maker enables a system that gives users the ability to create these stablecoins when they deposit collateral. The price of Dai is pegged to the US dollar so 1 DAI = $1USD. Dai is a collateral-backed stablecoin. Currently MakerDAO only accepts collateral in the form of ETH but this is soon subject to change as Maker plans to allow additional collateralized assets. When a user borrows dai they are also creating dai as each dai is backed by a larger amount of collateral. Currently, the minimum collateralization ratio is 150 % but this is subject to change as the system’s volume grows and more collateral types are accepted.

CDP

The Maker system runs on Collateralized Debt Positions (CDPs). When a person deposits collateral they have the option of then borrowing a loan of dai. At the moment the most they can borrow is 66 percent the value of their collateral. A Collateralized Debt Position (CDP) is different from a Collateralized Debt Obligation (CDO) in that the risk is individual rather than spread out across multiple debitores. The collateral and debt belongs to just the person who is opening the CDP. In a collateralized debt obligation there are pools of assets that belong to different investors.

Unlike other stablecoin projects, MakerDAO holds the collateral in transparent reserves. Therefore it remains viewable and untouched by Maker within a CDP. The only way collateral is touched is if the value of a person’s collateral drops below the liquidation ratio (at that point its 150 percent ratio). In that case the CDP will be liquidated.

MKR

In addition to Dai and CDP’s the system consists of a governance/utility token called MKR. As a governance token, MKR is used by MKR holders to vote for the risk management and business logic of the Maker system. Risk management is crucial for the systems success and survival and happens through voting on specific risk parameters for each collateral asset and CDP type.

As a utility token MKR is required for paying the fees accrued on CDPs that have been used to generate Dai in the Maker system. Once fees are paid the MKR is burned. This process contributes to the value as it changes the total supply of MKR.

History

The concept and mechanics were invented by Rune Christensen and Nikolai Mushegian in 2015. The project did not undergo an ICO (Initial Coin Offering) but was rather developed through private investors and its developer community’s enthusiasm for the project.