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What is Maker? – A 3 Minute Guide

  • Maker is an Ethereum-based decentralized autonomous organization.
  • Maker holds a 47.17% dominance in the DeFi lending space.
  • The MKR tokens are the governance token of the Maker DAO ecosystem. 

Source: Medium

Maker holds a prominent place in the Ethereum ecosystem today and has built quite a reputation in the crypto world. So, what is Maker? Maker is an Ethereum-based decentralized autonomous organization. It is the organization behind Maker tokens and DAI stablecoins.

Are you wondering what’s the role of MKR tokens in Maker DAO? You must have heard of DAI, a popular Stablecoin. DAI is a part of the Maker DAO ecosystem, and Maker helps minimize the volatility associated with the DAI stablecoin. DAI’s value is pegged to the US dollar at a 1:1 ratio. When it comes to governance of DAI, it’s in the hands of the Maker token holders.

What is Maker? – A Quick Intro to how it Works!

As we described above, the Maker platform hosts both DAI stablecoin and MKR tokens. Maker is a prime example of how the Ethereum smart contract platform can be used to build high-value products and services.

Let’s look at one instance of how the Maker platform operates. Suppose, you want 500 Dai, and the collateralization ratio is 150%. It means that you will have to collateralize $750 worth of Ether to create 500 Dai.

Once you collateralize ether, it will be held in a collateralized debt position, also known as CDP. Straightforwardly speaking, CDP is a program. It enables Maker’s smart contract to set your collateral aside.

Now, let’s say that you want to return the 500 Dai that you created by collateralizing $750 worth of Ether. In this case, you will be paid from the ether that you collateralized through the collateralized debt position. But the 500 Dai that you created will be destroyed in the process.

There’s one very important question that strikes a user when they read and explore the Maker project. They wonder what happens in the case of the price rise or fall of ether. We will explore that part in detail.

There are two situations that we will explore here, and these are:

#1. What happens when ether price increases?

#2. What happens when ether price decreases?

What Happens With Your Collateral When There’s a Rise in the Ether’s Price?

There’s nothing to worry about in the case of an increase in the prices of ether. It is because your collateralization ratio is already above 100%. In case of a price rise of ether, your current position will be strengthened further as the price rise of ether makes your position even more collateralized.

The continual rise in the prices of ether can be a cause of worry for Dai. The reason behind it is that if ether prices keep going up, Dai’s value, too, will keep increasing. This is the exact reason why the Maker team has placed a system to keep a tab on this process.

When the price of Dai goes above $1, the Dai community members are incentivized to create additional Dai from the same collateralized debt position. The increase in the circulation of Dai leads to a reduction in its prices. Thus, the value of Dai is effectively back to $1. This way, the collateralization ratio, too, is back to 150%.

What Happens With Your Collateral When There’s a Decline in the Ether’s Price?

We have already seen above that price rise in ether’s value is not a concern. But is it the same when the ether’s value starts falling? Unfortunately, not! The situation is much more complicated when it comes to the drop in the prices of ether.

The Maker team has already put a system in place in case of a drop in the prices of collateralized ether. It, too, uses Ethereum smart contracts. Let’s say that there’s a decrease in the prices of ether. 

Suppose, the fall in the ether prices is such that the collateralization ratio falls below 100%. In this case, there won’t be any justification for Dai’s value to be equal to $1. Thus, this situation threatens the stability of Dai.

In the case of a fall in ether’s prices, the security inside the collateralized debt position is liquidated by Maker. They undertake the liquidation process while the collateralization ratio is still over 100%. The aim after liquidation is to use the funds to buy back Dai. They keep buying Dai until the ratio of all Dai in existence is again fully collateralized.

The Role of MKR Tokens

Source: DeFi Empire

Maker is the governance token of Maker DAO. Anyone who wants to create Dai on the Maker platform will have to use these MKR tokens. They will have to use MKR tokens to pay the fees to create a collateralized debt position, and only then, they would be able to create Dai.

After each use, the MKR tokens get destroyed. With MKR tokens being burned in increasing numbers, the value of MKR tokens will increase. Thus, fewer MKR tokens will be required for transactions on the Maker ecosystem.

The MKR token holders can vote on every decision that is proposed to be implemented on the Maker network. They can also make proposals.

MKR Token Price Movements

On January 31, 2017, the price of MKR token was over $24, and by August 2017, each MKR token was worth over $295. By December, the price of MKR tokens increased by more than thrice its value in August the same year.

2020 proved the worst year for MKR tokens as it has remained within $500 most of the year so far. The first two months of 2020 were comparatively better than the rest of the months in 2020. Between January 2020 to February 2020, MKR tokens remained in the range of $500-$700.

The downfall in the prices of MKR tokens came from March. Since then, the prices of MKR tokens have remained in the range of $200-$600. The current price of Maker is $560.13.

The Road Ahead

Source: NeedPix

As of now, Maker DAO holds a prominent place in the Ethereum ecosystem. With its Dai stablecoins growing in stature, Maker has established itself as one of the leading names in the crypto space. Due to the strong performance of both MKR and Dai, Maker DAO is expected to grow even further.

The DeFi sector is growing at a tremendous pace this year. In the DeFi lending segment, Maker continues to maintain an upper hand with over 47% dominance. Their market share and dominance may take a hit because of new players entering the market. But Maker will continue as a name to reckon with when it comes to the DeFi lending and DeFi as a whole.

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