Note: This article is not financial advice.
The most obvious project to start with is MakerDao. The reason why is because it replaces central banking and clearly demonstrates the power of blockchain and decentralised finance. MAKER is the name of the organisation, and DAO stands for decentralised autonomous organisation.
The first thing to know about MakerDao is that it is a series of smart contracts or programs running on Ethereum. So you can think of it as a decentralized central bank and a stable coin. The stable coin is called DAI, and the token that governs it is called MAKER. Pretty simple, right.
To use this ecosystem, anyone is free to deposit Ethereum or other collateral into a MAKER vault, which will generate a DAI loan. Since this is a loan, you must pay interest on it; this interest is called the stability fee, and it must be paid in MAKER tokens.
If the price of DAI is below $1, the stability fee will increase incentivizing DAI holders to pay back their loans so those DAI can be burned to lower the supply and bring the price up.
If the price of DAI is above $1, the stability fee lowers to incentivize people to take out DAI loans which will generate more DAI tokens increasing supply and bringing the price down. This is similar to what central banks do or at least what they’re supposed to do during the recession. Central banks will lower the interest rates on loans they give out, incentivising people and businesses to take out loans.
They use these loans to build their businesses and stimulate the economy. During economic booms, they raise interest rates, keeping people from taking on excessive debt and helps minimize bubbles and the pain of extreme market cycles.
However, after the financial crash of 2008, the Federal Reserve Bank lowered the interest rates from about 5 per cent to 0.1 per cent to stimulate the economy and bring us out of the Great Recession. But then they kept them low for six years before bringing them back up, which is why we had the longest bull run in history.
The problem with this is then they only got them back up to about 2.5 per cent before the virus hit. And now we’re in another financial crisis, but interest rates are pretty much zero now. So this gives them two options; take interest rates below 0% or print money to stimulate the economy via stimulus packages.
We’ve already seen historic money printing for the stimulus packages but in the u.s. We haven’t ventured into negative interest rates yet. İf you take out a loan with a negative interest rate, you are literally getting paid to take free Money. As amazing as this sounds, it’s not available for the average person, only to commercial banks and large institutions.
We won’t benefit from negative interest rates, and we hardly get any benefits from stimulus packages. On top of that, the central bank’s print money and inflate the supply to pay for government deficits to pay to bail out banks that took on risky bets.
Here we have the main problem with a central authority governing monetary policy. They always fail us in the end. So this is why it is so important that we have a decentralized monetary policy. And this is what MakerDao and DAI create.
Like Bitcoin and Ethereum, no one entity owns the MakerDao ecosystem. No one owns governance of it, and no one entity controls the MAKER token. İts primary function is to create a free, stable economy that is open to everyone in the world anytime.
And it’s working already; this is a mind-bending innovation that incentivizes everyone to participate in behaving while enabling efficient decentralized versions of our current infrastructure. Let’s dig into how this works as I said, MakerDao is a series of smart contracts like Ethereum .these smart contracts are programs that can store money without anyone controlling it.
Like email, it has permissionless access, so anyone in the world with a little crypto can access financial tools such as lending and savings accounts. To access it, you simply send some of your Ethereum or other collateral into a MAKER vault. Which will then generate DAI in the form of a loan, and you’re off.
One of the common criticisms of this industry is its volatility. İt’s hard to price goods and services in a currency that can move tens of per cent in a day. So a stable coin is a digital coin that maintains a one-to-one ratio with the US dollar or other currency. Removing that volatility as long as the volatility of the dollar remains low.
İt’s important to note that stable coins are stable to the dollar. Not necessarily stable in value. İf the dollar changes in value, these coins change with it.
DAI is a digital currency that maintains a value of one dollar for one DAI. But unlike the dollar, it is open universal unbiased and can be used by anyone anytime, anywhere in the World. Of course, there are other stable coins like USDT, TrueUSD or USDcoin. But these are centralized, stable coins.
MAKERs stable coin DAI is decentralized. The fact that it can maintain its peg to the dollar while being decentralized is an absolutely incredible achievement. The largest stable coin is USDT or Tether. İt is currently valued at over 61 billion dollars. But I would not touch it with a ten-foot pole. Although they claim the tether tokens are 100% backed and that you can always trade in your USD tokens for dollars in a one to one ratio, they’ve never been publicly audited and are most likely operating at a fractional reserve and lending out the rest.
This is exactly what traditional banks do the only Tether isn’t FDIC insured, so USDT holders have virtually no protection in the case of insolvency. Also, they’re in heavy legal battles with the US government.
That doesn’t stop millions of people from holding and using USD T because it is already widely adopted has a strong network effect is on almost every exchange. It can be transported anywhere globally, and like every other market in the world, this one is also crazy and irrational. The party just keeps going on until it doesn’t.
Let’s say you deposit $150 worth of ether into a MAKER vault as collateral. The most DAI you can get is $100 worth or two-thirds of your collateral value. So why would you take out a loan where you have to deposit more than what you want to take out. This is an important question, and ı’ve got a few answers for you.
The first reason, liquidity. If you hold ETH tokens, chances are you expect the price will increase over time. But maybe money is tight, and you need some cash, but you don’t want to sell your ETH, especially since there’s a taxable event you can take out a loan on your ETH just like you can take out a loan on equity on your house or car.
Then you pay back the loan to get your ETH back even if the price of ETH has skyrocketed since you took the loan, you still pay back the same amount of DAI you borrowed.
The second reason you may want to do this is the leverage you can deposit that $150 of ETH, get a loan of a hundred DAI and buy more ETH with it. İf you’re feeling really risky, you could then take out another loan on the new ETH you bought and get another $60 of DAI. Let’s get into why this is risky!
I mentioned you have to deposit 150 per cent more than the loan you want to take, but that’s not entirely accurate. 150 per cent is the point of liquidation. İn the physical world, if you don’t pay back your car loan, your car will be repossessed. This is an expensive process. It requires the legal system.
But with DAI, this is much simpler. If the value of your collateral goes down to 150 per cent of your loan, your collateral is immediately sold off in the open market, and you pay the penalty. So it’s an incentive to avoid being complacent.
So if you want to take a loan of a 100 DAI, maybe you want to deposit $300 worth of ETH. And here’s why, since this industry is so volatile, it’s a good idea to keep your collateral position well above the liquidation threshold.
So if you deposit $300 worth of ETH and take out a hundred DAI, you have 300% collateral, and then ETH would have to drop 50% for you to be liquidated. İf it starts to drop, all you have to do is add more ETH to keep your collateral percentage nice and high, and some services can do this automatically for you.
So what happens when my collateral is liquidated? When the value of your collateral goes down to 150 per cent, it is removed from the smart contract sold on the open market for the MAKER token, and then the MAKER token is burned. That way, the value of your collateral is evenly distributed to everyone holding the MAKER token. So you lower supply, the price of all of them go up.
I mentioned that no one entity is in control of the MAKER ecosystem. İf that’s the case which makes the decisions who determines the stability fee, who determines what can be used as collateral. This is the purpose of the MAKER token. Holders of the MAKER token vote to decide on what the interest rates are for the DAI loans, and they vote to add new collateral types for DAI loans.
One MAKER token is one vote, and since the value of DAI mines is stable, the MAKER token appreciates in value as the ecosystem grows. İn addition to governance, the MAKER token has a couple of other uses you should be aware of.
The first, as I mentioned, is the interest on the DAI loans, also known as the stability fee. When you take out a DAI alone, you must pay it back in full, and the interest that has been accrued must be paid back in the MAKER token.
When you pay that interest back, those MAKER tokens are burned, removing them from the supply. This leads to an increase in the value of MAKER tokens and benefits all participants equally. The same is true when your loan is liquidated, you’ll have to pay back your loan plus the interest and a 13 per cent penalty.
That 13% penalty is an incentive to avoid this. But if it happens that 13% is used to buy MAKER tokens on the open market and then burn them, lowering the supply of MAKER tokens. So once again, benefiting all MAKER holders equally.
In 2017 when Maker was first launched, its price was around 24 USD. In two months after its launched ıts price extremely went up to 250 USD. More than 10X. The end of 2017 reached its first all-time high with a price of 1.700 USD. In six months, we saw 70x.
Following 3 years till 2021, its price accumulated between 500 USD to 1000 USD. and Maker started its bull run again in July 2021. and in May 2021, we saw 6.000 USD as its second all-time high. But after recent market crashes went down dramatically to 2.100 USD.
These days end of July 2021, Maker again started moving up till 2.700 USD., and we are expected more than it is, around 4.000 USD, to get close to its second ATH.
Maker is ranked as number 37 according to the coin market cap, and it is always in the first 50 cryptocurrencies.
The MakerDao ecosystem is comprised of the DAI stable coin, the MAKER token, and the collateral. Unlike other stable coins, DAI is decentralized and maintains its soft pegged to the u.s. Dollar into one to one ratio through game theory.
The MAKER token is used to maintain the peg to the dollar and is used for voting in the MAKER ecosystem. İt also appreciates as the ecosystem grows. The stability fee or interest on your DAIl owns must be paid in MAKER tokens, which are then burned. And the same goes for the liquidation penalty. This lowers the supply of MAKER tokens driving the price up.
You must keep your collateral to debt ratio above 150 per cent to avoid forced liquidation and paying the 13% liquidation penalty. This penalty will likely decrease over time as the volatility of collateralized assets decreases.
Anyone anytime, anywhere in the world can deposit collateral into a MAKER vault and receive a DAI loan. Five types of collateral can be used right now, but in the future, this will include things like stocks, bonds, real estate, and much more.
MakerDao is a decentralized autonomous organization that replaces central banking with an open, borderless, fair and neutral system that is the next Lego block in decentralized finance. This is the future of Finance, and we are still so early.
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