What is MakerDAO

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What is MakerDAO? | A Quick Overview

MakerDAO is a decentralized autonomous organization based platform that contains the maker coin (MKR) which acts as a governance coin, and the DAI which is a stable digital currency.

This creates an ecosystem wherein MKR tokens, and their holders govern the DAI token and its stability.

The Purpose of The MakerDAO

Before we dive into the structure and set-up of the MakerDAO, we need to discuss what it is.

Now, this may be confusing but stay with us on this explanation.

The MakerDAO is a DAO (decentralized autonomous organization).

That means there are no leaders, no central entities, but only a group of holders who govern the system independently.

Now the MakerDAO is made up of three primary entities:

  • MKR coins
  • DAI Stablecoins
  • CDPs (Collateralized Debt Positions)

The system itself functions without governance by utilizing this different coin.

Starting with the maker coin which is the backbone and governing mechanism of the system.

Then by using a collateralized debt position, tying up collateral allows for the creation of the stable coin, DAI.

Similar to the U.S. government, but with complete transparency, this functions like the Federal Reserve and the U.S. Dollar.

Where every time you pull out a $1 you know that it is $1 and not some variable amount.

Meaning that production of dollars has to meet the amount of value spread around in the network to keep $1 at the worth of $1 in the system.

So again:

  • MKR coins govern the system
  • These are used and locked up/burned in CDPs
  • The CDPs can produce DAI to keep its worth stable

This creates a decentralized organization that can stay out of the volatile reaches of money, similar to the USDT token, except with complete transparency in backing.

It is also the aim of most of the cryptocurrency movement to create self-running organizations that don’t require a “human touch” or central governing entitiy.

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The Governance Structure of The Maker Coin

MKR coin has two main purposes:

  • A utility token
  • A governance token

MKR Coin as A Governance Token

Maker coin holders can use these tokens in governance for the overall system.

By holding maker coins you vote for the risk management and business logic of the entire Maker system.

These risk parameters are set rigorously and since they are used in the system to determine such parameters as usually how much extra collateral is needed for generating DAI tokens, or how much each DAI can be backed with.

Maker Coin As A Utility Token

On the other hand, MKR functions for a utility purpose.

MKR is required for utility based fees required by CDPs to generate DAI.

Only MKR can pay the fees, and once it is used it is burned, removing it from the total supply.

That means that with more adoption of DAI and CDPs, there will be more demand for MKR coins to fulfill the networks need.

Creating DAI with a CDP and Its Purpose

Now, DAI, on the other hand, is created from MKR coins.

How this happens is the MKR holders vote on a governance model.

This model is translated into an algorithm which helps to figure out how the organization runs and what is needed to keep a coin stable.

Do they need more DAI? How much should each DAI be backed by?

When this is decided the MKR coins are funneled into a collateralized debt position, which allows for the funds to create DAI tokens or back them properly.

That leads to these MKR coins being burnt and taken out of the total supply for good.

Which can lead to the driving up of price and rarity of what they can end up doing.

What Are DAI Tokens For?

This DAI stable coin was created with the intention of creating a coin that is stable within the Ethereum ecosystem which can experience volatility.

DAI is backed by some form of valuable asset, in many cases the CDP with MKR coins.

This makes it possible to take long positions on DAI and hold assets there that you want to be stable.

Making volatility and having to experience the markets every move a thing of the past.

How Can The MakerDAO Perform In The Long Term?

We normally don’t do a segment like this, although MakerDAO is different than many of the other coins.

They have designed an ecosystem within an ecosystem to try and create stability.

If the stability sticks, this coin could likely perform phenomenally as it would be a way to circumnavigate both the USDT and Steem Dollars.

With all of these different currencies, finding stability is something so crucial to the ecosystem.

In the long term, with the low amount of MKR and the fact that they will become more commoditized based on utility, they will likely increase in value.

What We Think of MakerDAO

Based on the reasons above and the design of the ecosystem, MakerDAO is something we are watching.

We currently don’t hold any but will make sure to update those interested as news comes out.

Systems like this, become something of a test in the cryptocurrency ecosystem, so as that test plays out we can see what ends up happening.

If you liked this review and want to help support the academy donate some MKR below!

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February 23rd 2018, 15:05