What is cryptocurrency Maker (MKR) and how does it work? Complete beginner's guide

What is Maker (MKR)?

The Maker Protocol stands as one of the largest decentralized applications (dApps) operating on the Ethereum blockchain. Initially devised by a diverse group of developers, it operates under the governance of the MakerDAO.

Comprising MKR holders worldwide, MakerDAO forms a decentralized autonomous organization (DAO). These MKR holders possess the ability to stake their MKR tokens, enabling them to vote on proposed alterations to the Maker Protocol. Their involvement ensures the efficiency, transparency, and stability of Dai.

In many respects, owning MKR mirrors owning stock in a traditional company, as shareholders wield influence over the company's operations. The Maker ecosystem emerged as one of the earliest DeFi projects to attain substantial success, underscoring the efficacy of genuinely decentralized governance.

What is Dai?

Dai (or DAI) is a decentralized stablecoin pegged to the US dollar, offering neutrality and collateralization without reliance on a central authority. Unlike Bitcoin, Dai's value closely tracks that of the dollar, addressing concerns about cryptocurrency volatility.

In essence, Dai fills the need for a stable digital currency in the blockchain realm, allowing for the full realization of blockchain technology's potential. Unlike stablecoins like USDT, Dai is not controlled by a private entity, enhancing its impartiality. Additionally, Dai's collateralization mechanism ensures that new Dai issuance is backed by deposited cryptocurrencies in a smart contract through the Maker Protocol. Dai holders can further leverage the Maker Protocol to earn interest on their stablecoins, with the Dai Savings Rate dictating the amount earned.

How does Maker work?

The Maker Protocol generates additional Dai via smart contracts called Maker Vaults. These contracts can be initiated through different web interfaces and applications, serving as gateways to the network, such as Oasis Borrow or Instadapp. When a user intends to withdraw their collateralized cryptocurrency from the smart contract, they must repay the Dai they generated, along with a stability fee.

The MKR token serves as a means to govern the Maker Protocol. Proposals for voting are implemented as smart contracts and can be launched by any Ethereum address. The MKR community of holders then votes on the proposals, with the Ethereum address garnering more approval votes in MKR gaining administrative access to enact the proposed changes in the Maker Protocol.

What do Smart Contracts entail?

Originally termed by computer scientist Nick Szabo in the 1990s, smart contracts are a form of computer code that enables digital facilitation of business transactions or agreements between multiple parties. These contracts automatically execute when predetermined conditions are fulfilled. Stored on a blockchain, they are immutable and distributed, ensuring they cannot be altered and their results are validated by all network participants.

Who founded Maker?

The Maker ecosystem's history encompasses several phases, beginning with the establishment of MakerDAO in 2014 by Rune Christensen, a Danish entrepreneur and University of Copenhagen graduate. After his studies in international business and biochemistry, Christensen co-founded the recruitment firm Try China before transitioning to blockchain.

In 2017, Dai was officially launched on the Ethereum network, followed by the establishment of the Maker Foundation in the subsequent year. The foundation, led by Christensen as CEO, is dedicated to fostering ecosystem growth and spearheading decentralization efforts. Other notable figures on the board include President and COO Steven Becker, who previously founded Cubit Capital, and economist Shefali Roy.

Initially, only Ethereum could be collateralized via the Maker Protocol, resulting in the generation of Single-Collateral Dai (Sai). In 2019, the Multi-Collateral Dai (MCD) system was introduced, allowing for the deposit of various Ethereum-based assets approved by the MKR holder community.

What sets Maker apart from others?

Maker presents its community of MKR holders with an exclusive chance to actively engage in the governance of Dai, a leading stablecoin in the market. Through their MKR tokens, holders can vote on various proposals, including:

• Adding new cryptocurrencies as collateralized assets to generate additional Dai
• Adjusting the Risk Parameters of these cryptocurrencies
• Modifying the Dai Savings Rate
• Selecting oracles, which supply real-time market price data to the Maker ecosystem
• Upgrading the system

The voting influence of each user corresponds to the magnitude of their MKR stake.

Risk parameters

Once an Ethereum-based crypto token gains approval as collateral for Maker Vaults, the community must determine specific parameters to manage its risk. These parameters are shaped by the asset's risk profile and include:

• Debt ceiling: This denotes the maximum amount of debt that can be generated by specific types of cryptocurrency assets. Once this threshold is reached, no additional Dai can be minted by that vault until some or all of the debt has been repaid.
• Stability fee: This fee, payable in Dai, is necessary to retrieve collateral from the smart contract. It is an annual percentage yield calculated on top of the generated Dai amount.
• Liquidation ratio: This value reflects the expected market price volatility of the cryptocurrency asset according to MakerDAO's assessment.
• Liquidation penalty: If a liquidation occurs, this fee is added to the value of a vault's debt.

Should a vault be considered too risky based on these parameters, it undergoes liquidation via automated auctions.

What attributes contribute to the value of Maker?

The value of Maker stems from its role as a DeFi governance token. The ability to vote on Dai management decisions creates demand for MKR, thereby impacting Maker's market price.

While MKR tokens do not provide dividends, their value is anticipated to increase alongside the success of Dai.

What is the circulating supply of Maker (MKR) coins?

MakerDAO initially launched with a supply of 1 million MKR tokens. Currently, there are approximately 902,000 MKR tokens in circulation, with a market capitalization exceeding 2.1 billion USD. However, the total supply of Maker tokens, and consequently their value, fluctuates depending on market conditions and prices.

If the cryptocurrencies held in a Maker Vault smart contract experience a sudden decline in value, they may no longer provide adequate collateral for the generated stablecoin, resulting in liquidation.

In the event that the Dai obtained in the auctions is insufficient to cover the vault's liabilities, new MKR tokens will be created. Conversely, if more Dai than necessary is generated, it is used to repurchase Maker tokens, which are subsequently burned. The total supply of MKR adjusts dynamically, impacting its price, while Dai remains pegged at $1 USD.

How does one utilize Maker?

The primary function of Maker tokens is for participating in the governance of the protocol and Dai. Each MKR token equates to one vote when locked in a voting contract. Users pledge their Maker tokens to a proposal, and the outcome is determined by the total number of MKR tokens it accumulates, not the number of MKR holders.

Furthermore, Maker tokens serve as a resource for recapitalization since the MKR supply can increase if the system debt surpasses the surplus. This encourages Maker token holders to exercise prudence in risk-taking and responsibly govern the Maker ecosystem.

Due to its relatively high volatility, Maker tokens are not commonly used for transactions, but some individuals may opt to use them for speculative investment purposes.

How do you select a Maker wallet?

The choice of Maker (MKR) wallet typically hinges on your intended usage and the amount you plan to store.

Hardware wallets, also known as cold wallets, offer the highest level of security with offline storage and backup. Both Ledger and Trezor provide Maker (MKR) storage solutions. While hardware wallets may involve a learning curve and come with a higher price tag, they are ideal for storing larger amounts of MKR, particularly for experienced users.

Software wallets present another option and are both free and user-friendly. They come in the form of smartphone or desktop applications and can be custodial or non-custodial. Custodial wallets manage and back up private keys on your behalf, while non-custodial wallets utilize secure elements on your device for key storage. Although convenient, software wallets are generally considered less secure than hardware alternatives and are better suited for smaller MKR holdings or less experienced users.

Online wallets, or web wallets, are also free and easy to use, accessible via web browsers on multiple devices. However, being hot wallets, they are less secure than hardware or software options. As you are entrusting the platform to manage your MKR, it's crucial to select a reputable service with a strong security and custody track record. Therefore, online wallets are best suited for holding smaller amounts or for experienced traders.

Maker minting

Maker tokens, unlike numerous other cryptocurrencies, cannot be mined. Instead, the process involves minting and burning MKR tokens.

The MakerDAO initially debuted with a supply of 1 million MKR tokens. However, the supply, and consequently the Maker price and market capitalization, fluctuate as MKR tokens are either minted or burned by the Maker ecosystem in response to price variations.

Choosing Maker

Maker was among the pioneering projects to attain significant adoption within the DeFi sector, efficiently managed by a community of MKR holders. It provides users with the opportunity to participate in the governance of one of the largest stablecoins by market capitalization and encourages responsible voting. A well-governed ecosystem results in a higher amount of the MKR supply being burned, thus driving up the Maker price.

In the future, Maker aims for increased adoption and further decentralization. This involves promoting the utilization of its stablecoin, Dai, across various industries and business products beyond DeFi. Potential beneficiaries span sectors such as charities, gaming, prediction markets, and cross-border transactions for international trade. Maker stands out as a rare project that delivers both real-world utility and fulfills its promise of growth and innovation.