DeFi Token Spotlight: Maker
A Detailed Dive into the original Decentralized Credit Platform, and the issuer of the first Decentralized Stablecoin, DAI
The key characteristics of DeFi
Maker: The Original Decentralized Credit Platform
Avalanche at a Glance
Co-Founded by Anatoly Yakovenko in 2017, Solana is a high-performance, permissionless layer 1 blockchain that aims to achieve scalability through implementing several novel design mechanisms. Existing blockchains, such as Ethereum, can only process 15 transactions per second. This limitation often results in a congested network, and the ramifications are exponentially rising transaction fees as well as slowed confirmation time on transactions. Solana’s goal is to solve these issues by implementing several unique designs.
Solana has 8 key innovations that allow it to perform as one of the fastest, cheapest blockchains despite rising demand and usage. The in-depth analyses of these innovations can be found here, written by Anatoly Yakovenko. Solana differs from Ethereum starkly and requires a different programming language to build on. This means all new infrastructure must be developed from the ground up, something Ethereum began in 2014.
In summary, these innovations allow the current state of Solana to sufficiently process 2,000+ transactions per second, without the threat of exponential rising transaction fees. In time, as processing chips become more advanced due to Moore’s Law, the Solana network’s throughput capabilities will tenfold, allowing it to potentially achieve 50,000+ transactions per second.
In 2021, Solana saw exponential growth within several key areas. This growth can be seen by the increase of wallet address, Total Value Locked (TVL), and Solana’s market capitalization.
Maker at a Glance
Maker (MKR & DAI)
Stablecoins serve as a foundational pillar for almost every DeFi protocol on any blockchain. Since Summer 2020’s DeFi explosion, the total supply of stablecoins has exponentially grown, reaching $100+ billion in total supply. However, not all stablecoins are the same. Stablecoins can be broken into two separate categories, custodial and non-custodial. Custodial stablecoins are the most used stablecoin, usually backed off-chain by traditional assets (fiat currency). However, custodial stablecoins are still subject to regulations and authoritative scrutiny. Non-custodial stablecoins intend to take the working concepts of custodial stablecoins and utilize the benefits of blockchain technology.
The most common non-custodial stablecoin is known as DAI by Maker Protocol which resides on the Ethereum blockchain. This specific type of stablecoin is defined as an over-collateralized stablecoin backed on-chain by digital assets as collateral. Maker’s innovative Multi-Collateral Dai system gives users the ability to mint (or generate) DAI by leveraging on-chain digital assets as collateral. DAI is an algorithmic stablecoin with a soft peg to one US dollar, $1 backed by on-chain digital assets that are deposited into Maker Vaults. Maker Vaults are smart contracts that lock users’ deposited tokens and grants them the ability to mint (or generate) DAI. This allows users the financial freedom to unlock their tokens value without having to sell them.
Maker Vaults are essentially unbiased, digital banks that grant a user liquidity in exchange for specific collateral. Let’s use an example like a mortgage to explain how this works. Banks give individuals a loan for locking the ownership rights of the house with them. To free the Bank’s ownership of the house, the individual must repay all debt back to the Bank. Maker Vaults have a Stability Fee that continuously occurs on the DAI outstanding and can only be repaid in DAI.
However, since crypto markets are volatile, there are increased risks associated with borrowing liquidity from Maker Vaults. Liquidations are possible depending on the fluctuations of the deposited collateral in the Maker Vault. Liquidations occur when a Maker Vault’s collateral value marked in USD falls below the Vault’s threshold.
DAI and Governance
MKR holders can vote on governance proposals to determine the parameters for liquidation. MKR holders can also vote on which digital assets are allowed to be used as collateral on the protocol. The main parameter which determines liquidation of a Vault is the collateral-to-debt ratio of a Maker Vault. Different digital assets may have different parameters which determine whether a vault is too risky and is liquidated. All these functions are carried out using smart contracts on the Ethereum blockchain. This means that all actions performed on and by the Maker Protocol are publicly viewable.
Every DAI minted into circulation is backed by collateral and the value of the collateral is higher than the outstanding debt of the Maker Vault. This is how Maker Protocol ensures solvency, by maintaining an over-collateralized system. DAI can only experience inflation when backed by collateral and can only experience deflation when debt of a Maker Vault plus fees is paid back. In case of emergency situations or serious upgrades to the protocol, Maker does have an Emergency Shutdown. This function is used as a last resort when Maker experiences a malicious attack. It can also be used for serious upgrades that could put the protocol if not properly installed.
MKR holders have the authority to execute this Emergency Shutdown by voting. It is important for MKR holders to be diligent and active within the protocol to maintain a healthy system. MKR is a governance token and has an additional function as the source of recapitalization for the Maker Protocol. When Maker debt exceeds the surplus, the MKR supply could inflate through a Debt Auction to recapitalize the system. This responsibility helps align MKR holders with a positive overall outlook for the entire Maker Protocol.
One of the most popular DeFi applications to date, Maker racked up close to $17 Billion in total deposits into Maker Vaults. With that, approximately $9.5 Billion DAI are in circulation. This ranks Maker in the Top 5 of all DeFi applications, helping prove its unique design enabling greater financial freedom to individuals.
FEATURED EDUCATION
DeFi 101: A Guide to Decentralized Finance
Decentralized Finance, or DeFi, has been rapidly gaining traction amongst the investment community. DeFi protocols, like Solana, Chainlink, or Uniswap, have real-world utility (and revenues) that are quickly displacing their traditional counterparts that require intermediaries to function.
In this digital resource, we’ll cover:
