MakerDAO is a decentralized autonomous organization (DAO) that enables DeFi lending through its collateral-backed stablecoin, DAI.
What is MakerDAO?
MakerDAO is a decentralized autonomous organization built on the Ethereum blockchain, focused on advancing cryptocurrency lending. It is powered by DAI (a decentralized, USD-pegged stablecoin) and the Maker Protocol (a dApp on Ethereum).
Through the Maker Protocol and DAI, users can obtain cryptocurrency loans at predetermined interest rates. Users only need ETH (Ether) tokens and a MetaMask wallet to borrow assets from the Maker Protocol.
To borrow from MakerDAO, users must first deposit ETH as collateral into a smart contract to receive a DAI loan. To unlock the ETH collateral, users must repay the borrowed DAI.
History of MakerDAO
Founded in 2014 by Rune Christensen, MakerDAO is one of Ethereum's longest-running projects, headquartered in Santa Cruz, California.
MakerDAO's stablecoin system was launched in 2017, built on the Ethereum-based Maker Protocol smart contracts.
A year later, venture capital firm Andreessen Horowitz acquired 6% of MKR's total supply, adding $15 million in capital. Today, MakerDAO has grown into one of Ethereum's most widely used DeFi projects, with over [$7.25 billion](https://www.defipulse.com/address-tag/maker) in locked token value.
What is DAI?
DAI is MakerDAO’s decentralized, asset-backed stablecoin, functioning as an ERC-20 token. To maintain price stability, DAI is softly pegged 1:1 to the US dollar (1 DAI = $1).
Unlike other stablecoins, DAI’s value isn’t backed by bank-held USD reserves. Instead, its value is derived from the total collateralized Ethereum debt held in the Maker Protocol.
DAI is exclusively generated through MakerDAO’s crypto-lending mechanism. When users deposit ETH as collateral, smart contracts generate DAI equal to the loan value. DAI tokens can be used like any other cryptocurrency.
Beyond borrowing, DAI can also be acquired via brokers or exchanges.
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Use Cases for DAI
As a versatile stablecoin, DAI serves multiple functions:
- Medium of exchange: DAI facilitates decentralized transactions.
- Store of value: DAI remains stable during market downturns, making it ideal for preserving wealth.
- DAI Savings Rate (DSR): Users earning DAI via exchanges can generate passive income by locking DAI in Maker’s DSR smart contract, accessible through Oasis Save or other supported platforms.
How Do DAI and Maker Vaults Work?
MakerDAO enables crypto-collateralized loans through DAI. But how does this process function?
The Role of Smart Contracts
MakerDAO’s lending mechanism relies on smart contracts called Collateralized Debt Positions (CDPs).
CDPs lock user collateral and establish liquidation ratios. For example, a 150% liquidation ratio requires ETH collateral worth at least 150% of the DAI loan value.
DAI is always overcollateralized—meaning borrowers must deposit ETH worth more than the DAI they wish to borrow. The platform enforces a 150% collateral ratio, allowing users to borrow up to 66% of their collateral’s value.
If market declines reduce collateral value below the loan value, the collateral is liquidated. Maker Protocol auctions liquidated vault assets via a market-based mechanism, using proceeds to repay loans and penalties.
👉 Learn how to secure crypto loans safely
Creating a Maker Vault to Generate DAI
To generate DAI loans, users need an Ethereum wallet (e.g., MetaMask or MyEtherWallet) and approved collateral (ETH or other ERC-20 tokens like LINK/WBTC).
Step-by-Step Guide:
- Visit MakerDAO’s Oasis Borrow to create a vault.
- Connect your wallet and click Get Started.
- Select a collateral type and click Open Vault.
- Set vault parameters (collateral amount) and confirm.
- Generated DAI is deposited into your wallet.
MakerDAO’s Governance Token: MKR
MakerDAO is a peer-to-peer organization where key decisions are made collectively by MKR token holders. MKR is an ERC-20 token compatible with Ethereum wallets and tradable on exchanges.
MKR stabilizes DAI’s value. Its price reflects DAI’s performance—new MKR tokens are minted or burned based on DAI’s volatility. If ETH collateral drops severely, MKR is sold to cover debts.
MKR’s max supply is 1,005,577, with 40% allocated to the team and early investors.
MakerDAO’s Governance System
MKR holders govern two critical aspects:
- Stability Fee: Annual interest rate on loans.
- Emergency Shutdown: Protocol protection against attacks.
Decisions are made via:
- Governance Polling: Non-technical proposals voted on by MKR holders.
- Executive Voting: Technical smart contract changes with competing proposals.
FAQs
1. Is DAI truly decentralized?
Yes. DAI’s value is backed by decentralized collateral (e.g., ETH) and governed by MKR holders, not centralized entities.
2. What happens if my collateral is liquidated?
Liquidated vaults trigger auctions. Proceeds repay your loan plus a penalty; any deficit becomes Maker’s liability.
3. Can I use other assets besides ETH as collateral?
Yes. Approved ERC-20 tokens like WBTC and LINK are also accepted.
4. How is DAI different from USDT or USDC?
Unlike centralized stablecoins (USDT/USDC), DAI is algorithmically stabilized via overcollateralization and MKR governance.
5. Where can I stake DAI for interest?
Use Oasis Save or supported platforms to earn DAI Savings Rate (DSR) yields.
Conclusion
MakerDAO’s decentralized lending platform thrives on principles of transparency and user control. With DAI and MKR, MakerDAO has solidified its leadership in DeFi, empowering users through innovative crypto-financial tools.
By maintaining its growth trajectory, MakerDAO is poised to redefine global crypto lending.
Disclaimer: Investing carries risks. This article is not financial advice.
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