The decentralization of finance should, theoretically, also lead to the decentralization of organizations. The first experiment in this was the Maker Decentralized Autonomous Organization (DAO) and its associated token – MKR. This project paved the way for a completely reimagined governance framework for crypto projects.
Here’s a closer look at this token’s impact on the digital assets sector and its implications for the future of the global economy.
Developed in 2015 by Denmark-based programmer Rune Christensen, Maker was one of the earliest Decentralized Finance (DeFi) projects. The platform’s core product is a stablecoin – Dai – which uses smart contracts to maintain its peg to the U.S. dollar instead of relying on banks and auditors.
Instead of relying on monthly statements and auditors to prove reserves, the Maker project uses smart contracts built on the Ethereum network to maintain its stablecoin. MKR token is used to maintain the Dai-to-USD peg. So MKR is issued or burned to sustain the DAI peg. MKR is also used to pay fees on the network and as a governance token for holders who want to vote on the operational issues for the project.
Like any other stablecoin, Dai is used by traders and investors as a safe haven asset that isn’t as volatile as traditional digital assets. These stablecoins can be held in reserve or used for transactions.
What separates Dai from other stablecoins is that it’s maintained by a DAO rather than a traditional organization. The holders of MKR tokens are the investors or shareholders that help maintain the supply of Dai and keep the project running. This makes the project open and transparent as anyone can simply check the blockchain to verify transactions, reserves and governance decisions.
Maker’s underlying framework is a little complicated, but investors must make an attempt at understanding how it all works.
The key to this protocol is a smart contract known as the Collateralized Debt Position (CDP). Anyone can deposit any Ether or ERC-20 token to this smart contract and get DAI in exchange as a loan. As long as the value of the Ether held in deposit is greater than the Dai outstanding, the value of Dai will remain stable at $1.
However, since Ether and ERC-20 tokens are volatile there is a chance that the value of this collateral falls dramatically. If the value falls below a certain threshold, MKR tokens are issued to fill the gap. In this way, MKR tokens stabilize the protocol and help sustain Dai’s peg to the U.S. dollar.
At the time of writing, the total value locked in the CDP is $7.6 billion, while there are 991,501 MKR tokens in circulation and each Dai is worth $1.0003.
The Maker project has maintained its position on the bleeding edge of DeFi. This month, the project issued its first “real world” loan. MKR holders voted to issue $38,000 of dai stablecoins to finance a mortgage loan. This opens the gate for Maker’s smart contract to accept real estate as collateral for its smart contract. It also marks the first time a DeFi project has been used to finance the purchase of a real world asset such as property.