What is Maker?

Cryptocurrencies are notoriously volatile; prices jump all over the place. Take Bitcoin: As of June 22, 2022, the coin trades for $20,185. In April 2020, as the pandemic shook global markets, the same asset traded for below $7,000, while in November 2021, Bitcoin was trading for $67,000. Stablecoins address this weakness. They are cryptocurrencies that tie their value to some other asset, often the US dollar, which means the cryptocurrency’s price fluctuates far less.

Maker and its DAO, or decentralized autonomous organization, aims to address these problems with its own stablecoins: MKR and DAI.

Maker, explained

Maker is part of a new wave of finance called decentralized finance, or DeFi, which refers to a variety of different financial tools that use blockchain to replace traditional intermediaries, such as banks, brokerages, or insurance companies. While some blockchain projects, such as Bitcoin, are used purely for transactions as a cryptocurrency, DeFi projects broaden blockchain by using it for non-custodial services such as lending. Maker is one of these projects.

As of June 22, 2022, it’s the top lending platform on the Ethereum blockchain with a $7.78 billion TVL (total value locked) and 20% dominance in the DeFi market.

Maker (MKR) is the governance token of the Maker protocol and the MakerDAO (decentralized autonomous organization). As of June 22, 2022, according to CoinMarketCap, the Maker price is $883 and the market cap is around $875 million. It’s even more scarce than Bitcoin. The max supply is only around 1 million MKR tokens (compared to 21 million BTC), and the circulating supply, at the time of this writing, is 977 million MKR tokens, which is 97% of the total supply.

MakerDAO (an open-source Maker project) is built on Ethereum, which is a blockchain that allows developers to build different projects. MakerDAO is meant to make borrowing and lending cryptocurrencies easier, removing the need for a middle man such as a trading platform or an ATM.

MakerDAO allows anyone to borrow and lend cryptocurrency loans without credit checks. The Maker network combines advanced smart contracts with DAI (a stablecoin) to accomplish this task.

All of this runs on Maker’s smart contracts. These are self-executing lines of code that do not require enforcement by a third party, such as a lawyer or a broker. Instead, the blockchain processes the contracts automatically, so long as the parties fulfill their end of the contract. If this obligation is not met, the first party is totally refunded. This ensures contracts cannot be broken while removing the need for a third party.

How MakerDAO streamlines lending and borrowing

Lending and borrowing crypto is not easy. Prices move a lot, which means a loan issued in one cryptocurrency could require a radically different repayment (in its dollar value) compared to the amount loaned. This both deters lenders and borrowers. Would you borrow a cryptocurrency knowing your payment obligation could go up almost infinitely, or lend knowing you could receive basically nothing in return if the price skyrockets?

MakerDAO resolves these problems by integrating lending with its own stablecoins. These stablecoins maintain the same value, which means lenders and borrowers have a better idea of how much will be repaid. MakerDAO uses two distinct cryptocurrencies to facilitate lending. These are DAI and MKR. Both of these are from the same protocol, but they have radically different purposes.

The first of these, DAI, is the one you can use to borrow and lend different cryptocurrencies. It has a steady value of 1 US Dollar, so it would take a financial meltdown to seriously disrupt its value. DAI is an ERC20 token, which refers to a set of standards used by developers to make tokens on the Ethereum blockchain. 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, it can be used for online purchases similar to many other cryptocurrencies.

DAI can be stored on hardware or software wallets, so long as they are able to hold Ethereum tokens. Two of the market leaders in hardware wallets, Ledger and Trezor, both support DAI tokens. (Hardware wallets have an upfront cost, but they are more secure than leaving your crypto on a trading platform or in a software wallet. Most software wallets also support DAI, since it’s no different than any of the other ERC20 tokens.)

While DAI is the frontend of the MakerDAO system, MKR is used to maintain the system, stabilizing the price of DAI and voting on the operation of the Maker system. By holding MKR, a user has some say over how the MakerDAO system operates. MKR 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.

A closer look at how MakerDAO loans work

To understand how this works, it’s necessary to understand how MakerDAO’s special type of loan works. MakerDAO’s smart contract loans are called collateralized debt positions, or CDP for short. These CDPs are bought with Ether, and in exchange a user receives DAI. The ETH that is paid acts as collateral for the loan. This means users can take out a loan against their ETH holdings. Upon repaying the loan, the issued DAI is destroyed. There are also MKR transaction fees during this process. How does MKR save DAI from price fluctuations? If the price of DAI is too low then MKR can be produced and sold on the market to raise additional collateral and cover the debt obligation.

MKR holders gain voting rights proportional to the amount of MKR they hold. MKR holders vote on features of MakerDAO such as the amount of collateral needed for a CDP. Participating in these votes isn’t just a way for users to influence the platform; voting gives rewards in the form of additional MKR tokens. These tokens can then be resold for profit or held and used to gain greater influence over MKR votes.

How is Maker different from Bitcoin?

Maker is very different from Bitcoin. Bitcoin was created as a peer-to-peer payments network. This means that it can be used for online transactions. Its blockchain maintains a digital ledger that keeps track of how much bitcoin individual users have and hides the identities of those users behind a complex combination of letters and numbers known as a public address. Bitcoin also functions as a store of value, not unlike gold. To mint new bitcoin, computers solve complex mathematical puzzles, using up a lot of memory and energy in the process. This is a process called mining. The energy used in mining costs money, as does the hardware needed to mine bitcoin. Both these costs are seen as an investment that contributes to the perceived fundamental value of Bitcoin.

MakerDAO has two distinct cryptocurrencies, each of them different than Bitcoin in their own way. The first is DAI, the platform’s stablecoin. Tied in value to the US Dollar, this is radically different from Bitcoin, a currency known for its price volatility. DAI also has a very different purpose than Bitcoin, as DAI is used for cryptocurrency lending. Bitcoin has no such functionality.

MKR, a so-called governance token, is even more radically different than Bitcoin. MKR has a number of different purposes on the MakerDAO platform. It is used to back up the value of DAI, preventing it from falling too low or rising too high. It also allows holders to vote for the risk management and business logic of the Maker system, which means users can influence how MakerDAO itself is governed. New bitcoins, on the other hand, come from miners solving difficult mathematical puzzles. These miners are then rewarded with freshly minted bitcoin.

As an investment, Maker and Bitcoin are both very different propositions. A Bitcoin investor might have faith that Bitcoin will be used more and more as a payment system, or that it will take its place as a new gold. Maker, on the other hand, is linked to the DeFi movement, and its success depends upon the success of crypto as a whole. If there is a large demand for cryptocurrency loans, Maker should do well.

During the span of one year, from June 2021 to 2022, the total value locked (TVL) in MakerDAO has gone down a bit, going from $8.63 billion to $7.68 billion, but still, it’s the top lending platform in the DeFi space. As of June 22, 2022, even in the ongoing crypto crash, MakerDAO has held its position and is in pretty good shape as compared to other DeFi protocols like Aave, which has gone down significantly in the same period, going from $12.56 billion to $4.52 billion.

How to buy and sell Maker

Both MKR and DAI can be bought on a cryptocurrency trading platform. If a user wants to trade them against other cryptocurrencies or the US dollar, this is the way to go. However, if you find crypto trading platforms complicated, you can use a crypto brokerage like Wealthsimple to trade MKR, DAI, and many other digital currencies. Unlike crypto trading platforms, they are easy-to-use and regulated.

if a user wants to buy Maker and hold them as a long-term, secure investment, then a hardware or software wallet can be used. Hardware wallets are more secure, but they do cost money which could deter smaller investors. In contrast, software wallets are usually free. As a stablecoin, DAI will not change in value very much, so it makes more sense to buy MKR as an investment.

Increasing growth of MakerDAO

Here are some recent MakerDAO developments:

In response to the lack of financing during the covid pandemic, 6s Capital was founded in 2020 to facilitate loans via the MakerDAO protocol. Tesla signed a real estate finance arrangement for $7.8 million on March 30, 2022, with 6s Capital, a commercial lender powered by MakerDAO. Tesla will utilize the money to build a new repair and collision center. When a second project from Tesla is finished later this year, the credit line offered to Tesla is expected to climb to $14.2 million.

On the MakerDAO forum, an application to onboard loans produced by Huntingdon Valley Bank (HVB), founded in 1871, for use as collateral has gone live. HVB is a community bank with assets of $500 million. If MakerDAO accepts its loans as collateral, it will be the first time a traditional lender has been able to use DeFi to borrow against its assets.

Due to the huge interest of investors in cryptocurrency loans, MakerDAO is now the top crypto lending credit facility on the Ethereum blockchain. As of June 22, 2022, it has a $7.68 billion TVL, whereas Aave has a $4.52 billion TVL. Keep in mind, Aave V3 is available on seven different networks and has over 13 markets, while MakerDAO is only available on the Ethereum network. At the time of this writing, almost 6.83 million Ethereum coins are locked in MakerDAO, whereas around 4.06 million Ethereum coins are locked in the Aave platform.