An In-Depth Look at MakerDAO

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We announced last week that Maker (MKR) and Dai trading is now available on CoinList. MKR and DAI can now be purchased, sold, converted, sent, received, and stored directly in CoinList wallets. We have long believed in MakerDAO and were eager to meet with the Maker team to discuss the project’s progress.

1. What is the Maker Protocol, also known as the Maker system?

MakerDAO is a decentralised organisation dedicated to improving financial stability and transparency in the global economy. Dai, the world’s first unbiased currency and leading decentralised stablecoin, is created by MakerDAO. Dai reduces volatility by utilising an autonomous system of smart contracts known as the Maker Protocol, as well as decentralised community governance.

The Maker Protocol, built on the Ethereum blockchain, enables a stable store of value. Current elements of the Maker Protocol are the Dai stablecoin, Maker Collateral Vaults, Oracles, and Voting. MakerDAO governs the Maker Protocol by deciding on key parameters (e.g., stability fees, collateral types/rates, etc.) through the voting power of MKR token holders.

The vast and dynamic Maker community is an essential component of MakerDAO. The Maker community includes people and organisations that actively participate in building or supporting MakerDAO, ranging from MKR holders and Dai users to developers and supporters.

The Maker Ecosystem Growth Foundation (the “Foundation”) is a notable community participant tasked with bootstrapping MakerDAO to fuel growth and drive the organisation towards complete decentralisation. While the Foundation initially provided development assistance through the launch of Multi-Collateral Dai (MCD), it is now leading efforts to decentralise future development.

With hundreds of integrations and one of the strongest developer communities in the cryptocurrency space, MakerDAO has become the engine of the decentralized finance (DeFi) movement. Maker is unlocking the power of the blockchain to deliver on the promise of economic empowerment today. Visit

2. MakerDAO includes a two token model, MKR and DAI. How are these tokens different and how do they interact with each other?

Dai lives completely on the blockchain, making it borderless and available to anyone, anywhere. Though currently on the Ethereum blockchain, Dai is built to be blockchain agnostic.

All Dai is backed by a surplus of collateral that has been individually locked by Maker Protocol users into audited and publicly viewable Ethereum smart contracts. Anyone with an internet connection can monitor the health of the system anytime at

Dai extends the power of traditional currency with the benefits of the blockchain: It can be freely sent to others, used as payments for goods and services, or locked in a smart contract to earn savings.

MKR is the governance token of the Maker Protocol. As a governance token, MKR is used by its holders to vote on a number of different things. Voting is used to execute changes to parameters inside of the Maker Protocol like Stability Fees, the DSR, Debt Ceilings, among many others. Voting is also used to make decisions on the non-technical aspects of the protocol like asset priority lists, governance processes, role mandates, and even electing individuals to fill specific roles. To learn more about governance in the Maker Protocol visit the Governance FAQ.

3. According to the network’s documentation, DAI is created through smart contracts called Maker Vaults. Can you please elaborate on how DAI generation works and how it normally operates?

The Maker Vault is a key component of the Maker Protocol that allows Dai to be generated against locked up Collateral.

The use of Vaults affects the total supply of Dai. Users generate Dai against their Collateral and destroy Dai when they repay their generated Dai balance. This process takes place on-chain, allowing for full auditability of the circulating Dai and the Collateral backing it.

Vaults must be overcollateralized and have a Liquidation Ratio that Vault owners must maintain in order to avoid liquidation of their positions. Furthermore, a Debt Ceiling is imposed on the Maker Protocol as a whole, as well as on each Vault type individually.

Any user who wishes to generate Dai may do so by depositing Collateral in a Vault and paying a Stability Fee on the generated Dai balance.

Vault users are free to generate or pay back Dai and can add or withdraw Collateral with no time-constraints. As long as Vault owners maintain a minimum Collateralization Ratio, specified for each Vault type as the Liquidation Ratio, they may interact with their Vaults freely. If a Vault’s Liquidation Ratio is breached, the position gets Liquidated. To read more about Liquidation, visit the Liquidation FAQ. If a user wishes to reclaim the full amount of their Collateral, they will need to pay the full amount of Generated Dai back along with the Stability Fees owed.

For a granular view on the collateral locked in each user’s Vault and the overall health of each individual Vault, please visit:

4. What assets can currently be used as collateral in Maker Vaults? How are the parameters for each collateral type determined?

Currently, a Maker Vault can be created with ETH, BAT, WBTC, KNX, ZRX, USDC, TUSD, with additional collateral types being considered on a regular basis. The parameters for each collateral type are discussed, debated and voted upon by decentralized MKR holders. For an up-to-date list of possible vault collateral types please visit: To learn more, or participate in MKR governance, including discussing collateral types and parameters, please visit:

5. What happens when a user’s Maker Vault becomes undercollateralized? What happens to the collateral and who settles the outstanding debt?

Dai is soft-pegged to the US Dollar, with the additional benefit of being fully backed by real value in the form of various collateral assets. Liquidation helps to ensure that Dai is always backed by an appropriate amount of collateral by closing-out Vaults that are under their minimum required Collateralization Ratio for their given collateral type.

Liquidation is the process of selling collateral to cover a user’s generated Dai and related fees. A Vault can be Liquidated if the value of its collateral falls below the required minimum level, called the Liquidation Ratio.During the Liquidation process, sufficient collateral is sold to cover the debt plus a Liquidation Penalty, leaving any remaining collateral available for withdrawal by the Vault owner.

To ensure that the required surplus of collateral is always present, a class of users known as Keepers are incentivized to keep a constant eye out for Vaults that become under-collateralized. These Keepers are a subset of Maker Protocol users. They are the system actors who have an incentive to ensure that the outstanding Dai supply is fully collateralized and solvent.

Liquidation occurs through an Auction Mechanism built into the Maker Protocol.

The simplified order of operations looks like this:

  • A Keeper detects an undercollateralized Vault and triggers a Liquidation.
  • All of the collateral is put up for auction to cover the outstanding Dai+Stability Fees + Liquidation Penalty
  • Once bids reach the Dai amount equaling to the outstanding Dai + Stability Fees+Liquidation Penalty, the auction reverses and bidders now compete by offering to accept less collateral for the Dai they bid in the previous phase.
  • Once the auction completes bidders receive the sold collateral, the winning bidder’s Dai is burned, and the Vault owner may withdraw leftover collateral if any remains.

For a more detailed guide on how Auctions and Keepers work see The Auctions of the Maker Protocol on our Documentation Portal.

6. Beyond the Collateral Auction, there are two other types of auctions used to maintain the network, a Surplus Auction and a Debt Auction. How do these auctions work and what is the role in maintaining the system?

If the Collateral Auction does not raise enough Dai to cover the Vault’s outstanding obligation, the deficit is converted into Protocol debt. The Dai in the Maker Buffer covers protocol debt. If there is insufficient Dai in the Buffer, the Protocol initiates a Debt Auction. During a Debt Auction, the system mints MKR (increasing the amount of MKR in circulation) and then sells it to bidders for Dai.

If Dai proceeds from auctions and Stability Fee payments exceed the Maker Buffer limit (determined by Maker Governance), they are sold in a Surplus Auction. Bidders compete in a Surplus Auction by bidding increasing amounts of MKR to receive a fixed amount of Dai. When the Surplus Auction concludes, the Maker Protocol destroys the MKR collected, reducing the total MKR supply.

7. How does DAI typically maintain it’s USD peg?

Dai is not a hard-pegged currency, so it does not perfectly track the value of an existing fiat currency. Rather, it maintains a free-floating peg that experiences extremely low volatility against a fiat currency, currently the US dollar.

This stability is achieved through a combination of external market forces, complementary internal economic incentives, and policy tools controlled by MKR token holders. Many different market actors, each acting in their own self-interest but working together to maintain its stability, contribute to its stability. MKR holders, arbitrageurs, Vault owners, Keepers, and market makers are among these actors.

If Dai demand consistently exceeds Dai supply, or vice versa, it sends a signal to MKR holders that the Dai Savings Rate, a tool for influencing Dai demand and steering Dai monetary policy, may need to be adjusted. Raising the Dai Savings Rate appears to increase demand for Dai; lowering the rate decreases the demand for holding Dai. This ideally translates to a stable Dai peg.

Stability Fees for various Vault types are another policy tool used to help Dai stability but are primarily used for covering the risk premium of different Vault types. Decreases in a Stability Fee, reflecting the cost of borrowing, can incentivize the additional creation of Dai. Similarly, increasing Stability Fees can reduce the rate of Dai generation.

Arbitrageurs also contribute to the peg’s short-term stability by exploiting price differences across various Dai markets.

Vault owners can help keep the peg in place by taking advantage of opportunities when demand spikes push the Dai price above $1. This enables a Vault owner to issue Dai, which can be used to purchase assets with a variable amount of purchasing power. When Dai trades below a dollar, Vault owners are incentivized to buy Dai in open markets and pay down their Dai balances at a discount.

8. In regards to MakerDAO’s governance, how does governance work and who is able to participate?

A decentralised group of MKR holders governs MakerDAO. Anyone who owns MKR has the right to vote. MKR holders are primarily responsible for ensuring Dai’s stability and the overall health of the Maker Protocol. It is also in MKR holders’ best interests to focus on improving and expanding the Maker Protocol by establishing the governance processes and infrastructure required for effective system management. This includes, but is not limited to, establishing risk assessment standards for new Collateral and Vault types, ratifying Protocol role mandates (e.g., risk teams, governance facilitators, etc.), electing appropriate parties, and so on, establishing standards around vote types, and much more.

Another important responsibility for MKR holders is to publicly express their opinions on the various issues that Maker governance is addressing at any given time. Because the protocol and its governance are public and decentralised, serious participation in forum discussions and voicing opinions, as well as the reasoning behind them, is essential. Please join us on our forum at: to participate in Maker Governance:

9. How is MKR involved in recapitalizing the Maker Protocol?

While not a typical “recapitalization” in the sense of a corporation, the Maker Protocol employs the Debt Auction (also known as a “Flop Auction”) when the system Buffer falls below outstanding and undercollateralized Vault Dai debt. The system mintes MKR (increasing the amount of MKR in circulation) and then sells it to bidders for Dai as described above.

10. The Maker Protocol also has this concept of a DAI Savings Rate contract. How does this contract work and how is this different than a normal savings account?

The Dai Savings Rate (DSR) is a way to save money simply by holding Dai. To earn additional Dai, any Dai holder may lock Dai in a smart contract.

The Dai Savings Rate savings earnings are derived directly from the Maker Protocol. Dai is derived from the Maker Protocol, which charges fees for generating Dai from Vaults (referred to as Stability Fees) in order to fund the Dai Savings Rate function.

The Dai Savings Rate is determined by MKR token holders through governance. The rate is determined by a number of factors, including, but not limited to, the current supply and demand for Dai as well as the current stability fees charged on Vaults.

As DeFi continues to grow, we’re committed to providing a trustworthy market for these assets.


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