Maker (MKR) and the Dai token: Collateralized Debt Positions & Cryptocurrency

The Maker (MKR) platform is a promising look into the future of stability coins in blockchain. A fundamental problem Bitcoin and Ethereum suffer from is the lack of stability and excess volatility of their cryptocurrency prices. Due to this volatility, cryptocurrency has run into roadblocks when it comes to recognition as an ‘actual’ currency. The Maker platform is working to change that sentiment.

The Maker Platform

So under the Maker platform, a token known as Dai is used to provide this stability to the network. Dai is priced on a 1:1 soft peg ratio to the US Dollar. Dai is issued by the Dai Stablecoin system and acts in a decentralized way on Ethereum. Holders of the Maker token (MKR) are granted the right to governance on the Maker network. Obviously this means holders of MKR are able to vote in the Decentralized Autonomous Organization (DAO) of the Maker platform. This governance structure is utilized to help minimize price volatility and keep the Dai token stable next to the US Dollar. By providing the infrastructure for a stable digital currency, decentralized and reliable financial applications are possible.

Collateralized Debt Positions

Smart contracts on the network are known as a Collateralized Debt Position, or CDP. When the platform first launched, only single-collateral Dai was available under the guide is ‘Pooled Ether’ (PETH). Overtime, Multi-collateral Dai were introduced to the network, allowing support for many different types of CDP smart contracts. The CDP system is designed to prevent a collapse of the Maker platform. In the event that currency value becomes volatile or destablized, the Maker platform will automatically dillute the Pooled Ether to bring capital back into the system. Through upgrades, eventually Maker will remove the Pooled Ether and replace it with ETH and other cryptocurrency types.

The process for CDP has 4 steps:

1. Creating CDP and depositing collateral
2. Generating Dai from collateralized CDP.
3. Paying down debt and stability fee.
4. Withdrawing Collateral and closing CDP.

CDP acts as the guarantor for Maker and Dai transactions; With the stability fee only being payable with MKR. Debt from unpaid transactions accrues overtime and keeps generating interest as long as it is unpaid. Once the debt and stability fee are paid, the CDP becomes debt free and the transaction completes. All collateral can be retrieved and sent to a wallet by sending it through Maker.

Other mechanisms used by Maker to bring stability to the token are the use of feedback mechanisms and incentivized external actors. Ethereum can also be utilized for generation of Dai on the Maker platform. The price of Maker stabilizes based on a collateral-to-debt ratio of overall CDP. This is used to determine the value of collateral assets that holders of Dai receieve in the event of a global settlement.

Voting and Risk Management

The platform handles risk management through the DAO governance. Every Sunday the community meets to talk over proposals to the network and coordinating voting. So those who hold a significant amount of Maker tokens will have voting power over subjects concerning the following:

1. Adding a new CDP type
2. Modifying existing CDP types
3. Modifying sensitive parameter
4. Modifying target rate
5. Choosing sets of trusted oracles.
6. Modifying price feed sensitivity.
7. Choosing set of global settlers.

This means being an owner of the MKR token is a deal if you want to have voting power on the Maker platform. MKR ultimately acts as a ‘Utility’ token with governance power and a recapitalization resource for the Maker system. MKR is used for paying fees accrued on CDP’s being used to generate Dai in Maker.

It might seem like a complicated system at first glance, but Maker is a truly remarkable token. Some of the industries and functions backing it up are:

1. Prediction Markets and Gambling Applications
2. Financial Markets
3. Hedging, Derivatives, Leveraging merchant receipts
4. Cross-border transactions/remittances
5. Transparent Accounting systems

Only time will tell if Maker technology picks up, it does share some similarities with other coins, but overall it is a promising project for the future of Blockchain.

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