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How Maker DAO Works

10 March 2021| ZebPay Trade-Desk

The Maker (MKR) protocol essentially imbibes a bundle of smart contracts and is built on the Ethereum blockchain. Its most crucial purpose is to monitor, support and strengthen the value of the stable coin, DAI. Maker DAO is one of the most well-known, and first of its kind projects in the DeFi space. As a decentralized lending platform, Maker makes it possible to borrow and lend, in a much simpler, efficient, and organized manner, when compared to traditional financing alternatives. Its stated goal is to facilitate “financial freedom without volatility.”

MKR tokens are also used to pay transaction fees on the Maker system, and the protocol also allows token holders to exercise voting rights and hence has a strong governance system in place. This helps to ensure that users play an active role in the development of the Maker smart contract, and its native token MKR. 

Maker (MKR) Summary (at the time of writing):

Market Capitalization$ 2,195,433,065.55
Current Price$ 2,207.85
24 HR Volume $ 103,779,138.81
All Time High/Low$ 3,041.57 / $ 21.06
Script in Circulation 995,239 MKR
Total Supply 1,005,577 MKR

Maker (MKR) Protocol and Applications:

To enable the process of borrowing and lending to flow seamlessly, Maker DAO uses the Maker protocol to borrow against collateral. However, unlike traditional loans, which tend to accept fiat currencies as collateral, Maker allows its users to borrow against multiple crypto pairs, which the protocol supports. This is used as collateral which users deposit into smart contacts. These crypto loans are facilitated and are entirely managed by Ethereum smart contracts. The Maker Foundation has taken control over the Maker Protocol, to enable the transfer of ownership completely and operate as an decentralised autonomous organisation (DAO). The DAO consists of individuals who hold the MakerDAO’s governance token MKR, which provides the right to vote on changes to the network.

Two tokens reside at the heart of this protocol, DAI, and MKR. DAI is a stable coin and is pegged to the US dollar, and its operations are driven by supply and demand. We have covered DAI in detail in our previous report, where we explain the MKR DAI dynamics in detail. Meanwhile, the MKR token is used to provide liquidity to ensure that the system can deal with the accumulation of bad debts. The Maker Protocol’s loan functionality depends on smart contracts on the Ethereum network, technically termed collateralized debt positions (CDP), or in this case Maker Vaults

The MKR token has some key uses on the Maker DAO network. First, the governance rights it provides helps users to regulate the development of the protocol, coupled with the fact that MKR holders are also the last resort for buyers of Dai loans (borrowers). If the collateral (ETH) held in the Maker Vaults is unable to cover the amount of Dai in circulation, MKR is minted and then sold. This is done through a debt auction, so what is borrowed against the collateral can be serviced. Anyone can use Maker to open a Vault, lock in collateral such as ETH or BAT, and generate Dai as debt against that collateral. MKR’s functionality is aimed at incentivizing holders to act responsibly as they collectively govern the network. 

The Maker Protocol has always been focused on unlocking the possibilities of decentralized finance and providing developers and users with new, and more innovative financial tools. Hence, the Maker Protocol and DAI form a crucial base, upon which infrastructure for various other DeFi protocols is being built. DAI is now accepted by a large number of community-developed DeFi apps that use the Ethereum blockchain. A noteworthy example of that is Unicef.  They allow the use of the DAI token to fund open-source explorations of blockchain for social projects. Some DeFi apps such as Outlet, a high-yield alternative to savings accounts, and Uniswap are also part of the ever-growing Maker DAO ecosystem. Moreover, over time the adoption of Dai has positively impacted regions suffering from hyperinflation by offering a stable alternative to volatile fiat currencies to users.  The Maker DAO protocol is also penetrating the gaming industry as developers are using the blockchain to monetize and cultivate in-game economies, through the use of the DAI stablecoin. 

Investment Analysis:

Since the token launched in early 2017 MKR has traded in a wide range, after opening at $24.3, it went right up to $1,500 levels appreciating more than 6000% within a year of its launch. The lowest price it has witnessed is $21.60, which was well below its ICO price. After the initial bout of very high volatility in euphoric early days, MKR started to trade with comparatively low volatility.

MKR has become a key player in the DeFi space. This is primarily due to the belief that being a decentralized autonomous organization, MakerDAO’s long-term goal is to transfer its governance entirely to its users, who will then control and manage this blockchain entirely. As the DeFi space continues to grow, and DApps gain momentum, Maker is more than likely to be a key beneficiary. In the latest governance polls, users voted that Gemini Dollar (GUSD) and Pax Gold (PAXG) will be accepted as collateral currencies in the Maker Protocol, which has further strengthened its use cases.

The table below shows the returns associated with the MKR token, over a range of time periods. We have tried to depict how the asset has performed over time, but show how much ROI investments made in the asset at different times would have yielded.

MKRfrom ICO4 YRS3 YRS2 YRS1 YRYTD
ROI (%)8949.77%656.40%163.54%233.37%325.90%274.81%

As seen in the table above, MKR has shown incredible returns. From ICO the asset has seen an appreciation of ~9000% in its value, this is partly due to the growing interest in the asset among crypto enthusiasts and traders, and partly due to how rapidly the network is expanding as it deploys more and more crypto assets as collateral currencies. In more recent times, as the MAKER DAO protocol has matured, and its applications have become more mainstream, the asset has shown good resilience and stability, but at the same time good return for its holders. YTD ROI stands at ~275%. The belief in this asset class is further enhanced by looking at the locked USD value in MKR, which at the time of writing is ~6.2bn USD.

This year, so far, Maker has given an upside range breakout in Jan 2021 and within a month it made the all-time high of $3,041. We saw some correction or profit booking from the peak dragging the prices to $1,786. Technically, $1.786 was the key support (50% retracement level) and the prices bounced exactly from that support level. Hence we remain bullish on the asset until and unless the asset trades and closes below the support level. 

As developers continue to use DAI and the Maker Protocol to create innovative DeFi apps and grow the Maker Ecosystem, it will significantly increase its accessibility to users around the world. While the asset and the Maker ecosystem have already established themselves, we believe that this is still just the beginning, and share a positive outlook over the next few years.

References:

https://makerdao.com/en/whitepaper/

https://coinmarketcap.com/

https://defipulse.com/

Disclaimer : This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptocurrencies viz. Bitcoin, Bitcoin Cash, Ethereum etc.are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice

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