What are Maker MKR and Maker DAI?
Maker MKR is Maker’s proprietary token, and it’s sponsored by Ether rather than fiat currency. This is the basis of a secure, blockchain-based banking system that allows for easier international payments and peer-to-peer transfers. DAI is a stablecoin built alongside the principles of fractional reserve banking and connected to the Maker MKR. Simply put, it’s a safe haven that will escape the main market uncertainty.
An introduction to Maker MKR and Maker DAI
The competitive pricing is one of the key barriers to mainstream acceptance of crypto as currency. For example, in 2018 alone Bitcoin ranged in price from $6,000 to $17,000. No one wants to spend 10,000 virtually meaningless crypto tokens one day on a few pizzas, only to see the price spike over $100 million the next. The Maker DAI is a stablecoin intended to counter this instability.
Tether (USDT) is perhaps the most well-known stablecoin, but there’s a lot of controversy at the core of it. Critics and regulators dispute that it is backed by fiat money, as their creators say, although a recent study (note: not an audit) provided evidence that dollars backed the coin.
Either way, Tether lacks transparency, has a close link to the Bitfinex exchange, and was allegedly used in 2017 to control the Bitcoin price (and the crypto industry).
MakerDAO (founded by CEO Rune Christensen) uses its proprietary MKR token to secure DAI by a different approach. It’s a fascinating approach that closely follows fractional-reserve banking, which allows a bank to retain just a fraction of its deposit liabilities.
As for the collateral backing DAI, it’s not the US dollar or any other fiat currency – it’s Ethereum, and the whole system is built on blockchain technology and a smart contract environment.
We need to address the tokens themselves, their market cap and their coin price to understand the feasibility of Maker’s dual-token idea.
Breakdown of MKR and DAI
Creator has an total supply of MKR 1,000,000. The average price was $1,687.86 on January 20, 2018.
MKR on the Ethereum blockchain is an ERC-20 coin, which can not be mined. Instead it is created/destroyed in response to fluctuations in DAI prices to keep it stable around $1 USD. MKR is used on the Maker network to pay transaction costs, and the scheme is collateralised.
The closing of OasisDEX in 2019 sadly stunted the viability of the project. Still, the project held steady through the 2018 bear market for Ethereum (and the crypto-industry). The success is giving this stablecoin plenty of hope.
Holding MKR comes with voting rights under Maker’s ongoing voting scheme of approval. Bad governance devalues MKR tokens, thus incentivizing MKR holders to vote for the good of the whole system. This is, then, a fully decentralized and democratic system which is an underused blockchain tech USP.
DAI rarely amounts to $1 – it usually hovers between $0.98 and $1.02. Instead of mining, it is issued by buying a collateralized debt position (CDP), the smart contracts Maker makes that act as a loan. Once the loan has been paid out (along with MKR fees), the DAI will be destroyed as the smart contract fulfills.
You need to convert your ETH to wraped Ethereum (W-ETH) to buy the DAI stablecoin. That is how decentralized exchanges like 0x allow the Ethereum blockchain trades between ETH and tokens.
On Oasis Direct, MakerDAO’s decentralized token exchange network, which also supports other ERC20 tokens on the Ethereum blockchain, converting between MKR, DAI, and ETH is finished. Other exchanges such as Radar Relay, HitBTC, Kyber, and Ethfinex also fund DAI and MKR, with a regular trading volume of over $1 million each. Also recently Maker confirmed a collaboration with AirSwap DEX.
Both tokens can be deposited in any ERC-20 compatible wallet. The Maker method looks complicated but it works in principle and the smart contract software has broader implementations around the world. The DAI stablecoin could shield individuals and institutions from fiat currency volatility as well as from hyperinflation in the short term.
MakerDAO’s Competitive Advantages
Maker’s biggest advantage to Tether is honesty. Internet research shows their relation and they have shared c-suite executives including Chief Strategy Officer Phil Potter (who stepped down from both in late June 2018).
Maker, on the other hand, is fully open about its blockchain project evolving. For example, on the MakerDAO SoundCloud page, you can find recordings of semi-weekly meetings over two years.
MakerDAO uses CDP smart contracts to create DAIs to collateralize the assets. This means that instead of fiat money, it is backed by ETH, and the CDPs ensure that there are still enough ETH reserves on hand to support the DAI supply. Essentially, CDP contracts hold ETH, and if there is a black swan event like ETH crashing before anyone has an opportunity to react, MKR is liquidated on the open market to cover the losses.
According to Ethereum blockchain scans, in March 2019, more than 2.1 million ETH (about 2 percent of the total supply) was locked in Maker contracts.
Maker is still working extensively on crypto-partnerships in 2018. It collaborated with OmiseGO, Digix, Tradeshift, Request Network, and CargoX. The more partners Maker gathers, the more viable it is to stablecoin.
What’s the Point of Stablecoins?
Volatility of values is a relative concept between cryptos and fiat currencies. For example, on 9 July 2018, the US dollar was worth 110,748 yen. $1 was worth 80.64 yen on 4 July 2011, and $1 was worth 255.65 yen on 18 March 1985.
There are significant exchange rate variations, and inflation within each country makes each currency worth different values, even when compared with itself. One USD in 1913 is today worth the equivalent of $25.41 and even $1 in 1993 is today worth the equivalent of $1.74.
Stablecoins do not contradict these fundamental important economic values. Both Tether and Dai have values attached to the U.S. dollar, instead. This is done to stabilize the price for exactly the reason set out in this article’s introduction.
While inflation and exchange rates can fluctuate over time and affect a pizza’s price, you will never be paying $50 million for one. A $12,000, a pizza made by Renato Viola in Salerno, Italy, was the most expensive one ever produced. It took 72 hours to create and was made with ingredients such as Kaspia Beluga caviar, Norwegian lobster, organic Arabian flour and hand-picked pink salt from the Murray River.
$12,000 in 1913 is today worth $304,955.15, after more than a century of inflation. This is one of the reasons why the 2010 pizza purchase of Papa John’s Laszlo Hanyecz retained its iconic reputation over the years, apart from being the first recorded Bitcoin purchase. The crypto has experienced more ‘inflation’ in less than a decade than the US dollar ever has in its entire existence.
Not every price change would be this dramatic, but the concept behind it had a lot of crypto ventures hindered. For example, the prices for ethereal gas are much more costly than when the network was first launched in 2015. It went from being worth some dollars to a few hundred in three years.
Now imagine you are using a project like Augur betting site, where you can take part in speculative markets like “Will Dwayne Johnson win the Democratic Presidential Nomination 2020?”
This competition is now open and does not decide the outcome until the summer of 2020. If you were to bet an ETH or BTC on this market, in two years from now their prices would be dramatically different. It’s just a gamble to hodle one of those cryptos from now until then, with ‘analysts’ like John McAfee betting one BTC in 2020 would be worth $1 million, while others think it’ll be useless.
Gambling is only one focus use-case for Maker. It can also balance capital market activities and foreign trade. Any case where the value is transferred may gain from a stablecoin, but this does not automatically mean this DAI would be the coin used for such purposes. Ultimately this is what the consumer must determine.
MakerDAO is an ambitious project for cryptos, aimed at a decentralized future. Launch on the Ethereum mainnet took three years of growth. Due to these big features, its developers are betting on its success.
- Maker is a two-token device that includes both the ERC-20 tokens MKR and DAI. They use ETH as a pair for trading.
- The MKR token and CDP smart contracts are used by Maket to keep the DAI token at $1. It is only soft-pegged to the US dollar and should the US economy collapse it can be moved to another currency.
- Maker is a decentralized exchange based platform. Many top decentralized exchanges bolster it.
- MKR holders hold voting rights on the Maker platform which are buyers of last resort for DAI stablecoin and are therefore encouraged to keep the platform running.
With these pieces in place, Maker is well placed to overtake Tether as the stablecoin of choice in the crypto world, despite multiple new stablecoins (and major development projects) competing with it.