The Maker protocol was one of the first decentralized autonomous organizations, or DAO, built on the Ethereum blockchain. MKR crypto is the governance token used by the MakerDAO to manage the platform’s stablecoin, Dai.
Maker established this two-token system, and the creation of the Dai stablecoin pegged to the U.S. dollar, as part of a larger plan to address the problem of volatility in crypto lending and borrowing.
While complex, MakerDAO has successfully pioneered DeFi innovations that drive its value. Keep reading to understand how MakerDAO and Maker crypto work, as well as Maker’s advantages and disadvantages for investors.
How Does Maker (MKR) Work?
To understand MKR, it helps to start with an overview of the Maker protocol. The MakerDAO is a novel use of blockchain technology and smart contract capabilities designed to make borrowing and lending cryptocurrencies easier and less risky for lenders and for borrowers. The protocol accomplishes this in two ways.
How MakerDAO Works
As it sounds, a decentralized autonomous organization or DAO, is set up to be both decentralized (eliminating the use of middlemen) and autonomous, meaning the entire organization operates using smart contracts. Smart contracts can execute numerous business transactions automatically using blockchain technology, as long as all conditions are met.
MakerDAO takes the smart contract concept to the next level, enabling the autonomous running of the entire protocol, making it truly trustless (meaning, that oversight or verification from a central authority isn’t necessary). MakerDAO supports transparency in that the Maker network and its processes are trackable via the blockchain.
This has enabled MakerDAO to create an innovative way to create a solution for lending and borrowing crypto via MKR crypto and its collateralized stablecoin Dai.
How MKR and Dai Work
Crypto prices fluctuate constantly, which means a loan issued in one form of crypto could lose or gain value — impacting the repayment of that loan. To address this problem, MakerDAO has created its own stablecoin, Dai, which is soft-pegged to the U.S. dollar. To be clear, Dai isn’t backed by U.S. dollars, but by other currencies that are locked in the Maker protocol as collateral.
Dai is also an ERC-20 token, which can function on the Ethereum blockchain. So if you take out a loan on the MakerDAO platform, the protocol creates Dai tokens. These are the tokens that users borrow and repay.
Once borrowed, Dai can be used for online purchases similar to many other cryptocurrencies.
Meanwhile, Maker crypto (MKR) is used to maintain this system. The MKR coin stabilizes the price of Dai and also counters fluctuations in the price of Dai. If the price of Dai falls too low, MKR is created. Likewise, if it rises too high, MKR is destroyed.
The Many Roles of MKR
The Maker ecosystem system is a versatile one. Maker is used to maintain the system, stabilize the price of Dai, and for voting on governance decisions. Maker holders have voting rights proportional to the amount of Maker they hold. Voting allows them to influence the platform, but they also receive additional Maker tokens as a reward.
Lastly, Makercan also be transacted globally, just like Bitcoin, and MKR can be used to pay transaction fees through any Ethereum account.
Advantages and Disadvantages of Maker (MKR)
Since its launch in 2017, MakerDAO has gained increasing interest from investors and from the DeFi community. Here are its pros and cons.
Maker has one of the highest total value locked (TVL) of any crypto — meaning the overall value of assets deposited in the network. And it is used by hundreds of apps and exchanges.
The Maker protocol offers an innovative solution to one of the problems in DeFi, which is the need for stability in crypto lending and borrowing — as well as transparency.
By creating Dai as a collateralized stablecoin, dependent on MKR, Dai can maintain its $1 USD value as a stablecoin.
And, of course, as a governance token MKR gives users input on how this platform is run.
That said, if things aren’t going well, and coins locked as collateral are sold for less than their earlier value, then the Maker system might need to raise funds through a debt auction. In a debt auction, new MKR tokens are created and then auctioned for Dai, but increasing the supply of MKR can reduce the price.
The March 2020 Ether price collapse and network congestion were evidence of systemic risk to Maker, and some users lost all their collateral.
Because Dai’s stability is predicated on collateralization and incentive mechanisms it is more volatile than its fiat-backed counterparts and rarely trades at exactly $1. A downside of MKR is that its value, to some degree, hinges on the adoption of Dai as a form of real-world currency.
• Maker has one of the highest total value “locked” (TVL) in a DeFi application at around $15.5 billion.
• Because Dai is collateralized it can be impacted by the value of other crypto.
• Over 400 apps and exchanges now use Dai and it’s a common trading pair within the DeFi ecosystem.
• The March 2020 Ether price collapse and network congestion indicated some systemic risk to Maker.
• Maker accepts multiple assets as collateral, including centralized stablecoins and assets.
• Because Dai’s stability is predicated on collateralization and incentive mechanisms it is more volatile than its fiat-backed counterparts and rarely trades at exactly $1.
Who Created Maker (MKR)?
A programmer named Rune Christensen, a Danish entrepreneur and graduate of the University of Copenhagen, developed the idea for Maker in 2014. Christensen and his team launched Dai in 2017.
Christensen studied international business and biochemistry before co-founding the recruitment company Try China. He then turned his attention to blockchain technology. After discovering Bitcoin in 2011, Christensen invested heavily in cryptocurrency. The Mt. Gox hack and collapse in 2014 spurred Christensen to pursue the concept of stablecoins.
The Maker platform is headquartered in Denmark and Christensen is still the CEO.
Why Does Maker (MKR) Have Value?
Maker’s value is grounded in its utility as a DeFi governance token, and the power to vote on how Dai is managed drives demand.
The community of MKR coin holders have governance in one of the largest stablecoins by market cap. Proponents of MKR hope to see the use of Dai across industries beyond DeFi; for example, charities, gaming, and cross-border transactions for international business trade.
Also, the MakerDAO is growing.Though Ethereum was the only asset that could be collateralized through the protocol at first, in 2019 the multi-collateral Dai (MCD) system was introduced. Today, any type of Ethereum-based asset that has been approved by the community of MKR holders can be deposited.
Price of Maker (MKR)
MakerDAO launched with a supply of 1 million MKR tokens and it is currently the 54th largest crypto, as of March 11, 2022. MKR is worth about $1,746 with a market cap of 1.7 billion and a circulating supply of 977,000 MKR.
Why Use Maker (MKR)?
Maker is prominent in the burgeoning DeFi industry, and its proponents expect it to be a critical factor in other sectors, such as gaming and cross-border transactions.
Also, MKR is run efficiently by a community of MKR holders, who have influence on the decisions that affect one of the largest stablecoins on the market.
Does Maker (MKR) Have Staking?
No, MKR cannot be staked. Staking typically involves locking up crypto as part of a proof-of-stake consensus mechanism, where users can approve transactions based on their stake and earn rewards.
In the case of MKR, investors can hold DAi (or hodl, as they say in crypto-speak) and may be able to earn interest from their holdings. But it’s not a traditional proof-of-stake system in that Dai isn’t built on its own blockchain, and doesn’t support external transactions like many other types of crypto.
Maker is used by the MakerDAO, which is built on Ethereum, the second-biggest crypto by market capitalization. MakerDAO also has its own stablecoin, Dai, which is collateralized with other crypto to support price stability for loans and other transactions.
MKR coin is a decentralized ERC-20 token used for creating and issuing smart contracts. Maker is prominent in the DeFi industry, and its proponents hope it could become a critical factor in gaming and cross-border transactions..
Last, while MKR tokens don’t pay dividends, MKR holders, who can contribute to the decisions that affect the future of the stablecoin.