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How Maker works.

When Mariano Conti wanted a loan for a new Ford Focus, he didn’t go to a bank. Instead, he drew a loan from himself, leaving his assets with himself as collateral, before paying himself back out of his own salary.

He was the bank. A one-man bank.

Now he has a car.

- Decryptmedia

MakerDAO or Maker is a decentralized autonomous organization that regulates the Dai credit system to ensure that the Dai Stablecoin maintains price parity with the US dollar. Maker has been likened to a decentralized central bank with an arsenal of financial levers at its disposal including control of interest rates.

Makers allows one to lock collateral in a smart contract called a collateralized debt position or CDP and automatically receive a loan in Dai according to the collateralization ratio (currently 150%). The value of Dai is derived from the collateral. Because Dai is backed by entirely digital assetrs stored in public smart contracts the solvency of the system is intrinsically transparent. In contrast other stablecoins such as Tether are IOUs for off-chain assets which cannot be openly verified and may not exist at all.

MakerDAO has been live for over a year. During this time Dai has weathered extreme price instability in Ethereum, from a rise to $1,400 followed by a fall to $85. As the price of collateral falls the Maker system will liquidate at-risk CDPs for Dai before the collateral no longer backs the Dai. At the time of writing, Dai is currently trading around two cents under the target price. Each week MKDR holders have approved interest rate hikes in an attempt to amend the problem.

The Dai Stablecoin is used by several Decentralized Finance protocols. Although the most popular DeFi protocol is Maker itself, over 10% of the supply of Dai is locked in to smart contracts associated with other DeFi protocols like Augur, Compound and [Bancor|Uniswap].

Some people do not immediately understand the utility of Maker. A question that is often asked is "What's the use of taking out a loan with Maker if you have to put up more than you receive? For instance, if you lock $150 of Ethereum in a CDP you will only receive $100 of Dai." Well, let's say you then sell the Dai for more Ethereum. If the value of Ethereum doubles you would have $500 of Ethereum, $300 of which is sitting in your CDP. After repaying your $100 Dai debt you receive your collateral back, netting you $400 in total. If you had just held the $150 of Ethereum during the same price increase you would only have netted $300. The best part? You did this all yourself, nobody supplied your Dai funds, you were your own bank.

Collateralization Ratio

The collateralization ratio controls the maximum amount of Dai that can be drawn out of a CDP. The minimum required collateralization ratio is 150%. Choosing a higher ratio returns fewer Dai but reduces liquidation risk.


Maker uses the MKR governance token to represent voting rights on the DAO. Recently, in an effort to restrain the supply of Dai, MKR holders voted to raise the stability fee (or interest rate) from .5% APR to 7.5% APR.

MCD (Multi-Collateral Dai)

The future of Maker is multi-collateral. At the moment the sole accepted form of collateral is Ethereum. In the future, MKR holders will vote on new collateral types. These collateral types will have adjusted collateralization ratios and stability fees (interest rates) to meet their risk profile.

The Importance of Dai in a World Without Cash

When you use digital money instead of physical cash you sacrifice many of your freedoms.

Many countries have been pursuing aggressive demonetization policies to drive people toward "e-money". In India, large notes were declared no longer legal tender and people were given a window to exchange them for digital currency. In Australia large cash transactions have already been made in illegal. In China, physical cash is uncommon as most people transact with WeChat. It has been suggested that in order to sustain negative interest rates such as those imposed in Europe and Japan, physical cash must be eliminated to prevent hoarding. Negative interest rates could come to the United States in the next recession if the Federal Reserve fails to raise current rates before then.

The end result of demonetization is a catastrophic loss of freedom and greater state and corporate control over individuals. Payment providers like VISA and PayPal are known for censorship. When a number of right-wing celebrities led an exodus from Patreon to SubscribeStar, PayPal promptly de-platformed the entire site. There have been calls by politicians and the media for banks to deplatform gun stores. There are no signs this trend is slowing down.

If a corporation won't deplatform you it will be the government. Which is why we need Dai more than ever. Dai has one property that Bitcoin does not - price stability. And unlike other stablecoins Dai is backed by cryptocurrency and not physical dollars sitting in a bank. Dai is what digital cash should be - uncensorable and stable.


Dai with zero knowledge proofs has been tested. Privacy is the most important feature Dai lacks at the moment.

Further Information