MakerDAO: What it is and how it works

By May 10, 2021May 17th, 2021No Comments
MakerDAO - What it is and how it works

MakerDAO is currently one of the most popular platforms in the DeFi world, so if you are familiar with the decentralized finance universe, there’s a good chance that you have heard of it. In 2020, even as the Covid-19 pandemic toppled fiat monetary systems across the globe, the DeFi space saw a significant rise in the number of daily active unique wallets, so much so that 2020 got dubbed the year of DeFi. This success of decentralized finance primarily got assigned to the MakerDAO platform, so big a part of the DeFi ecosystem it has come to be.

In this post, we talk about the MakerDAO platform, the DAI stablecoin, how it all works, and of course – MakerDAO price predictions for 2021. 

What is MakerDAO?

MakerDAO is best known as the platform to develop the stablecoin DAI . DAI is tethered to the value of the US dollar at a ratio of 1:1. Therefore 1 DAI = $1.

stablecoin DAI
(image source:

Created back in 2014, MakerDAO is an open-source project based upon the Ethereum ecosystem and a DAO or a Decentralized Autonomous Organization. However, the protocol launched the DAI stablecoins at the beginning of 2018. According to the market cap, the coin has grown significantly since then; as of the end of April 2021, DAI is ranked among the top 50 cryptocurrencies worldwide.  

DAI has been designed to lower the impact of the price volatility most cryptocurrencies experience. It’s safe to say that at this point, DAI and MakerDAO together form the backbone of the still-developing DeFi universe. 

How is DAI Different from Other Stablecoins?

DAI is definitely not the first stablecoin to exist upon a blockchain. It has its predecessors in USDT (Tether), TrueUSD, and more. Most stablecoins are usually backed by fiat currencies. Now, the threat associated with these stablecoins is that the custodial party that holds the actual fiat currencies can deny the redemption of any of these stablecoins on the ground of regulatory requirements. 

This is also the biggest difference between cryptocurrencies and stablecoins: while regular cryptocurrencies are permissionless, stablecoins are controlled by an authority figure. 

Moreover, there’s also the fact that the custodial party might not have the right amount of fiat currency needed to power the stablecoins since there’s no way to verify whether they are telling the truth.   

The Tether controversy has essentially made the traders and the crypto universe as a whole realize the issues associated with fiat-backed stablecoins. However, with DAI, traders can mostly forego the aforementioned risks. MakerDAO’s model vastly varies from other stablecoins primarily because it is decentralized – no central authority controls the issuance of DAI tokens. DAI is structured to use collateral in the form of Ethereum-based assets to preserve its peg to the US dollar. 

The decentralized nature of MakerDAO is made possible by the holders of MakerDAO’s governance token MKR, who govern the platform through a decentralized autonomous organization.

How Does the MakerDAO Platform Function?

Maker warrants the stability of its DAO by making use of CDPs or Collateralized Debt Positions. These are smart contracts that keep the collateral users deposited on the platform and allow the generation of DAI tokens for borrowers. The presence of the debt locks up the collateral deposited within the smart contract until the users pay back the amount they had borrowed in DAI. 

Naturally, once the debt is paid, a user can withdraw the collateral they had deposited. To preserve the system’s stability, an active CDP on Maker has a relatively higher collateral value than the debt.

This is how Maker works: first of all, a user has to send Maker their transaction to create a CDP. The user now funds the transaction, and once the collateralization is complete, the user can receive their DAI from the smart contract. The smart contract now accrues the debt and locks in the collateral deposited by the user until they pay back the debt and some additional fees like the Stability Fees payable in MKR.

This process allows MakerDAO to provide users with loans without requiring a trusted party to vouch for the borrowers or a KYC protocol.  Instead, with Maker, the repayment terms are at the user’s preference, and the smart contract guarantees the collateral’s security. 

Governance on MakerDAO

As mentioned before, governance on the MakerDAO protocol is supervised by the community of MKR token holders. Indeed, MKR holders can propose any changes in the way Maker is run or vote on the governance changes suggested by other users. MKR holders can vote on the many issues, including introducing new assets as types of collateral, changing the risk parameters of the existing collateral loans, picking price oracles and emergency oracles, and more. Further, MKR holders can also initiate an emergency shutdown of the Maker platform should they notice any threats or irregularities.

MakerDAO Price Prediction: Is It Worth Investing in 2021?

The MakerDAO price was around $582.22 on January 1 of 2021, and by the end of the month, it had already gone up to about $1,480.81. As of April 2021, Maker has been on a positive run so far, with MakerDAO price being near $4000 at the end of the same month. As per MakerDAO price predictions for 2021, the MakerDAO price will certainly go up despite market fluctuations.

Furthermore, according to MakerDAO price predictions and crypto experts the token could be trading at almost double its current value by the end of the year, with a MakerDAO price of over $7000. Going by these forecasts, it’s safe to call MakerDAO a safe investment as of right now.

And that was everything you need to know about the MakerDAO platform, all in one place, along with the MakerDAO price predictions. To trade DAI, and over a hundred other cryptocurrencies in India, do give MakerDAO on WazirX a visit!

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