What is MakerDAO?

What is MakerDAO?

What is MakerDAO?

…and how do you make money on it?

Dapps & Protocols

·

13 min

What is MakerDAO?

…and how do you make money on it?

Dapps & Protocols

·

13 min

What is MakerDAO?

…and how do you make money on it?

Dapps & Protocols

·

13 min

What is MakerDAO?

…and how do you make money on it?

Dapps & Protocols

·

13 min

What is MakerDAO?

In a world where financial systems have become increasingly centralized, MakerDAO has emerged as a revolutionary platform that offers a decentralized alternative. Founded in 2014 by Rune Christensen, the protocol has since become one of the most successful and innovative projects in the crypto space.

The idea for MakerDAO came about after Christensen saw the volatility of Bitcoin and other cryptos and recognized the need for a stablecoin that could be used for everyday transactions. He also saw the potential for a decentralized stablecoin to act as a reserve currency for other dapps and services. His vision came full circle with the evolution of DeFi, where users could trade DAI along with Tether and UDSC.


MakerDAO's primary product is a decentralized stablecoin called DAI, which is pegged to the US dollar and is designed to maintain a stable value over time. DAI is created by users depositing collateral in the form of other cryptos, such as ETH, into a smart contract called a Collateralized Debt Position (CDP). The CDP then issues DAI tokens to the user based on the value of the deposited collateral, with a target collateralization ratio of 150%.

Because MakerDAO is a completely decentralized protocol, anyone can mint DAI without going though KYC. Once minted, the DAI can be traded or be used as a hedge against volatility in the market. For example, users may convert their crypto holdings into DAI and repurchase the assets when the prices go down.

In addition to DAI, MakerDAO has its own governance token, called MKR. Its price is tightly correlated to the growth of DAI. As the market cap of DAI grows, the decisions that MKR holders take have a greater impact over the entire DeFi market. And Maker has its fair share of challenges over the years.

In March 2020, the value of ETH (which is used as collateral for DAI) plummeted due to market volatility, causing some CDPs to become undercollateralized and resulting in a shortage of DAI. To address this issue, MakerDAO held an emergency vote to increase the stability fee (the interest rate charged on CDPs) and incentivize users to deposit more collateral and create more DAI.


MakerDAO has also faced criticism over the centralization of its governance system, with some users and developers arguing that the project's voting mechanism favors a small group of token holders and gives them too much control over the protocol. Besides the internal disputes, MakerDAO has to deal with threats from the outside. One such concern is the risk of blacklisting USDC, which comprises the majority of DAI’s reserves.

In 2022, Circle, the issuer of USDC, was forced to comply with OFAC regulations and blacklist USDC addresses that interacted with Tornado Cash. Similar to MakerDAO’s structure, Tornado Cash is a decentralized coin mixing service that can be used to hide the origin of the coin transfers.

This event sparked fear among the MakerDAO community that DAI is at risk of losing its decentralization. If the US government wanted to attack MakerDAO, it could order Circle to blacklist USDC deposits MakerDAO. Such action would lead to DAI losing its backing overnight.


In reaction to the USDC concerns, MakerDAO has approved the “Endgame” proposal.  As a result, MakerDAO will be split into smaller DAOs, called meta-DAOs, to ensure its resilience against state attacks. The endgame is for DAI to decouple from the dollar and become the most decentralized stablecoin in crypto.

Though its ups and downs, Maker protocol (not to be confused with The DAO) has never been hacked. One of the reasons is that Maker religiously audits every upgrade, and has lived through every single wave of hacks since 2014. Like with every single DeFi protocol, there is always a risk for some bug to go unnoticed. Luckily, MakerDAO has more people watching over the protocol due to its sheer importance in the crypto ecosystem.

How does MakerDAO work?

MakerDAO allows the lending and borrowing cryptos without a middleman. Specifically, Maker is the organization that governs the issuance of its stablecoin, called DAI.

The issuance of DAI is governed by smart contracts, leaving MakerDAO shareholders to decide how the protocol evolves. For instance, MKR holders can vote to adjust the collateralization ratio, or change the mechanics of the protocol altogether. Every decision is carefully analyzed by the Maker community to ensure the value of DAI remains pegged to the US dollar.

Collateralized Debt Positions

MakerDAO works by using a system of collateralized debt positions (CDPs) to create DAI. A CDP is a smart contract on the Ethereum blockchain that holds collateral in the form of Ethereum and issues DAI tokens. The ratio of the value of the collateral to the value of the DAI is called the collateralization ratio. Currently, the minimum collateralization ratio is 150%, meaning that for every $1 worth of DAI issued, there must be at least $1.5 worth of ETH in the CDP.


Put simply, CDPs are simply where the collateral (ETH) in the Maker system is held. The onus is placed on the user to check his CDP in order to avoid liquidation. 

MKR Token

As previously mentioned, MKR gives its holders the right to participate in the governance of MakerDAO and earn fees. In addition to governance rights, MKR tokens are used to pay the stability fee, which is then burned. 

The role of the stability fee is to ensure that the value of DAI remains stable over time. If the demand for DAI increases, the stability fee can be raised to incentivize users to repay their DAI and reduce the supply of DAI in circulation. Conversely, if the demand for DAI decreases, the stability fee can be lowered to encourage users to borrow more Dai and increase the supply of DAI in circulation.


MKR tokens are used to pay the stability fee because they provide a way to align the incentives of MKR token holders with the stability of the DAI. MKR token holders are incentivized to maintain the stability of the DAI because the value of their MKR tokens is tied to the health of the system. If the stability of the DAI is compromised, the value of MKR tokens can decrease.

Another use for MKR is to act as a final defense mechanism in case of a major depegging event. MKR holders will have to act as the buyers of last resort. Should the collateral in the protocol not be enough to cover the amount of DAI issued, MKR is created and sold onto the open market in order to raise the additional collateral. This provides a strong incentive for MKR holders to responsibly regulate the parameters at which CDPs can create DAI, as it will ultimately be their money on the line should the system fail, not holders of DAI.

DAI Savings Rate

In 2019, MakerDAO has introduced a new upgrade that includes the concept of DAI Savings Rate (DSR), an interest rate that is applied to all DAI deposited in a particular smart contract. This interest rate is paid from the funds generated by the Stability Fee and its rate is also decided by a MakerDAO vote.

The DSR is designed to work in conjunction with the collateralized debt position (CDP) system that is used to create DAI. Users who hold DAI can lock their tokens in a smart contract that is called a DSR contract. By doing so, they are able to earn interest on their Dai at the current DSR rate.


The DSR is set by MakerDAO governance based on market conditions and is designed to be responsive to changes in the market. If the demand for DAI increases, the DSR may be lowered to encourage users to supply more DAI to the system. Conversely, if the demand for Dai decreases, the DSR may be raised to encourage users to hold on to their DAI.

One of the benefits of the DSR is that it provides a way for users to earn a passive income on their DAI holdings. This can be particularly attractive for users who are looking for a low-risk way to earn interest on their crypto holdings. The interest rate is typically between 0.25% and 8.00% but is capable of going higher should the community deem it necessary.

DSR can be seen as another method to maintain the stability of DAI besides supply-side economics alone. 

How to make money on MakerDAO?

MakerDAO offers some relatively low-risk ways of making passive income that either leverage MKR or DAI. These methods have been tested over time and are widely used by small players and big players alike. Let’s explore each of these money making methods!

Collateral Debt Position

This is an indirect way of making money using MakerDAO. The idea is to leverage your ETH and mint DAI. The benefit of issuing your own DAI is that you gain exposure to different crypto assets without having to sell your ETH. On the other hand, there’s always the risk of having your ETH liquidated if the ETH price falls below the 150% collateral ratio. If you want to get back access to your locked ETH, you will just simply repay your borrowed debt in DAI.

For example, you lock up 10 ETH in the CDP vault. At the time of the lockup, the price of ETH is $2000, so you’ve locked $20,000. For 10 ETH you will be able to borrow up to 3.3 ETH worth of DAI, which is worth $6600. You can pay back the borrowed 6600 DAI anytime and get your deposit back in ETH. Ideally, the price of ETH will appreciate in value, for example, $4000, which means you can repay 6600 DAI, but you get 10 ETH, worth $40,000.


The easiest way to create your own CDP position is via the Oasis app. The Oasis platform is used to perform all MakerDAO loan and lending features. For this example, we will issue a CDP position using the Maker Portal:

  1. Open the MakerDAO CDP Portal

  2. Open CDP

  3. Select how much ETH you want to collateralize. The amount of ETH you deposit must be equal in value to the amount of DAI you want to generate.

  4. Click “Generate”

  5. Approve the transaction

  6. Done!

The amount of DAI generated depends on the amount of ETH deposited. The ETH cannot be unlocked until the amount of DAI is returned. If the collateral value drops below 150% then ETH will automatically be sold. To prevent this situation, it is recommended to deposit more ETH into the system to prevent liquidation. 

DAI Savings Rate

DSR works similarly to depositing your money at the bank. The difference is that the interest is decided by the MKR token holders, based on the long-term stability of DAI. By adjusting the interest rate, it is possible for DSR to influence the demand for DAI. For example, an increase in the DAI savings rate will increase the demand for buying DAI and depositing it in the DSR contract to earn interest. Conversely, a decrease in the DAI interest rate will encourage users to use their DAI elsewhere.

Although it represents an easy way to earn passive income, DSR is subject to fluctuations based on the decisions taken by the MakerDAO. This strategy remains profitable as long as the interest rate is attractive enough to keep the DAI locked in the DSR contract. Users can unlock their DAI at any point, along with the interest earned. 


Here’s how to make money using DSR on Oasis:

  1. Open the Oasis App

  2. Click on the DAI asset and select the “DAI Savings Rate” option

  3. Input how many DAI you would like to lock and click “Deposit”

  4. Approve the transaction

  5. Profit

The DSR feature is started to become integrated with multiple services. For example, you can deposit in the DSR contract via the Argent wallet. Without any risk of liquidation, all it takes is for you to check the interest adjustments from time to time. If the interest is too low, this is a signal that the DAI may be useful somewhere else.

Price Prediction for MakerDAO — Can it hit $10,000?

Buying and hodling MKR — the native token of MakerDAO — is one way of potentially making money on MakerDAO.

By looking at its current price, it’s natural to think about the chance of MKR hitting $10,000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.

Let’s examine the potential growth of the MKR token by analyzing its tokenomics. MKR’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} MKR tokens being in circulation today, that means a price of {PRICE} per MKR.

How did we come to that calculation? It’s quite easy, the price of a MKR token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each MKR coin. 

By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of MKR at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for MKR to hit that price.

At a price of $10,000 per token, that means the current market cap of MKR would equal ${{CIRCULATING_SUPPLY} * 10000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $10,000.

Now let’s shift our attention to the fully diluted market cap.

Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.

The fully diluted market cap represents the total value of a coin if all tokens were in circulation. MKR’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} MKR which means that no more coins above that number will ever be created.

These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.

How does this impact the price of MKR? Taking into account the current price of a MKR token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. MKR coins that have been burned are not taken into consideration because they have been permanently removed from circulation.

Whether it seems gigantic or not, the number we came to above only takes into account the current price of a MKR token. Doing the same calculation but with a price of $10,000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 10000} for the MKR protocol fully diluted market cap.

These are all crucial details to know when calculating if MKR can reach the price of $10,000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.

The future of MKR depends solely on its growth as a network used by tens and hundreds of millions of users.

If you’re looking to add some MKR to your portfolio, the most trusted places to get some are Binance and Coinbase.


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