How MakerDAO facilitates pure peer-to-peer online lending

The MakerDAO project offers users a decentralized peer- to- peer lending mechanism by which to borrow funds in such a way that is inflation protected. We explore how the protocol runs and some use cases.

Key takeaways:

  • The price of the MKR token has risen 55% in the last two week and gained nearly sixfold this year to accrue a $4 billion market value;

  • The MakerDAO protocol is now a $9.5 billion collateral system which Citi bank has dubbed ‘’the decentral bank’';

  • Unicef works with Dai tokens to facilitate targeted and efficient donations to special tech and economic development projects;

  • MKR can be used to pay back the ground lost by a falling ETH to Dai holders which provides extra liquidity for the lending ecosystem.


What is the MakerDAO project about?

MakerDAO is one of the earliest and most popular projects attempting to make Decentralized Finance (DeFi) come to life. The project is a decentralized lending platform working on top of Ethereum. It acts as a bank would, but without the middleman of the institution taking an extra cut of the loans.

The way lending works traditionally, or at least ‘’secured’’ loans, is that if you want capital you need to pledge some sort of asset in return—the pledged asset is called the collateral, it is a type of guarantee for the lender in case you fail to pay her back on time. It may seem straight forward, but in practice it is full of rent seeking behavior from servicers, custodians, lawyers, and the burden of having to ‘’trust’’ or rely on a third party is.

MakerDAO has the added particularity of achieving a zero-volatility environment, something good for people borrowing in countries like Venezuela, where inflation is out of control. Lots of inflation means the cash in your pocket loses its purchasing power while your loan stays the same on paper. This means that your loan appears more expensive to pay back, which is not very fair to borrowers.

With this project however, instead of pledging something like a house, users deposit ETH in the heart of the Maker machine and in return receive the ‘’Dai token’’. So, ETH is exchanged for Dai, which means your loan is denominated in Dai.

The Dai token is special in that it is a stablecoin. A stablecoin is digital money that ‘’pegs’’ a crypto like Ethereum to the US dollar. To ‘’peg’’ a currency to the US dollar usually means to manipulate the price of a currency through open market operations. The same is true of stablecoin—they fight things like crypto volatility by being backed-up by fiat currency. So, it does not matter what the ETH fluctuation looks like today, your Dai is backed up by a less volatile US dollar instead.

Simply explained: the Maker Protocol

Without going into technical details, let’s try and walk through the protocol together in order to understand where the value added is. This matters because if you are an eager crypto investor, you should be aware of how the value is generated.

There are two currencies at play in the MakerDAO protocol. The Dai token, which we said above was a stablecoin used to denominate loans, and the MKR token, which is the governance token. One token is used for loans, and the other to run the incentive structure of the blockchain (blockchains use tokens to pay for the verification work nodes do).

Now, the MKR token has two jobs. Its first job, is to hand out voting rights to the ecosystem. In other words, MKR holders get to vote on things like what the annual borrowing fee ought to be, and how much ETH collateral there should.

The second job of MKR, is to act as a sort of central bank. A bank that comes in to save the day if the price of Ethereum suddenly crashes. It is a back-door solution to calibrate the collateral behind Dai denominated loans (ETH is the collateral, i.e. what lenders traded to receive Dai tokens). The basic point is that MKR can be used to pay back for lost ground if ETH were to fall, so that Dai holders are protected with extra liquidity in the lending ecosystem.

 

MakerDAO brings real estate to DeFi and other use cases

MakerDAO has a variety of use cases that serve the $60 billion DeFi industry, and because it builds off the Ethereum network, its potential for making meaningful decentralized applications is significant.

One such application is in the financing of social projects, which is why Unicef works with Dai tokens to facilitate targeted and efficient donations to special tech and economic development projects.

You may also have heard about Uniswap. Uniswap is a digital exchange that facilitates the automatic transfer of cryptocurrencies on the Ethereum blockchain through the use of smart contracts—it utilizes the Dai stablecoin.

The Dai is also attempting to make its way into the lucrative gaming industry as developers begin using blockchains to monetize in game digital items.

In the last two weeks, the MKR token price has surged 55% , and gained nearly sixfold this year alone to accrue a $4 billion market value! MKR is priced north of $4,200 as of this writing after falling slightly from its ATH of $4,500.

Because of a recent proposal that now allows stakeholders of MKR to finance real world tangible assets like mortgage loans (loans denominated in Dai, but real fiat money is taken out of the system) the MKR token has finally interacted with the ‘’meat world’’, the tangible world with a mortgage loan of $38,000.

The MakerDAO protocol is now a $9.5 billion collateral system which Citi bank has dubbed ‘’the decentral bank’’. Furthermore, Maker is reputable because it requires loans to be over collateralized which means someone taking out a loan has to put a larger guarantee to back up their pledge to pay the protocol back (more ETH is put in a secure vault).

The news that the protocol is now planning on tackling the physical world some more, is a major step forward and surely will inspire more to come both for MKR and the world of DeFi.

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