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.
MakerDAO or Maker is a decentralized autonomous organization that regulates the Dai Credit System. The goal of Maker is to ensure that Dai, a stablecoin, has price parity with the US dollar. Maker has been likened to a non-jurisdictional central bank for Ethereum.
The DAI credit system 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 the system operates entirely on a blockchain the solvency of the system is intrinsically transparent whereas other stablecoins are effectively IOUs for real-world assets such as gold or currency which cannot be openly verified.
MakerDAO has been live for over a year. During this time Dai has survived 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.
You might ask: What's the point 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.
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.
MKR Tokens and Governance
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.