If you've been following the cryptocurrency scene for a while, you've likely heard of MakerDAO. This decentralized platform enables you to borrow the DAI stablecoin by staking Ether (ETH) as collateral. In this article, we'll take an in-depth look at MakerDAO, exploring what it is, how it works, and how you can get started.
What is MakerDAO?
At its core, MakerDAO is a decentralized finance (DeFi) platform built on the Ethereum blockchain. It's designed to enable people to borrow and lend cryptocurrencies without relying on traditional financial institutions. Instead, MakerDAO leverages the power of smart contracts to create a trustless and transparent lending platform.
The platform's native stablecoin is called DAI, which is pegged to the value of the US dollar. This means that 1 DAI will always be worth $1, regardless of market fluctuations in the value of other cryptocurrencies.
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How MakerDAO Works?
Imagine you're at a farmer's market, and you want to buy some vegetables. However, you don't have any cash on hand, and the farmer doesn't accept credit cards. Luckily, you have a valuable item, say a watch, that you can use as collateral to buy vegetables from someone else at the market.
In this scenario, you are the borrower, the farmer is the lender, and the watch is the collateral. Now, let's say you want to buy more vegetables, but you don't have any more collateral to offer. This is where MakerDAO comes in.
MakerDAO is like a group of people at the farmer's market who are willing to lend you money against your collateral, in this case, Ethereum (ETH). Instead of relying on a traditional bank to lend you money, MakerDAO allows you to borrow the stablecoin DAI by staking your ETH as collateral.
So, in the same way, you could use your watch as collateral to borrow money at the farmer's market, you can use your ETH as collateral to borrow DAI on MakerDAO.
Advantages of MakerDAO
There are several advantages to using MakerDAO. These include:
Decentralization ≈ Freedom
MakerDAO operates as a decentralized platform, which means that it is not controlled by any single entity. This eliminates the need for intermediaries and creates a trustless system where you can transact directly with others.
All transactions on MakerDAO are recorded on the Ethereum blockchain, which means that they're publicly viewable and auditable. This increases transparency and reduces the risk of fraud or manipulation.
MakerDAO's stablecoin, DAI, is pegged to the US dollar, which means that it is not subject to the same volatility as other cryptocurrencies. This makes it an best option for those who want to hold a stablecoin that's not tied to any government or centralized authority.
MakerDAO allows you to collateralize your Ethereum (ETH) holdings to borrow DAI. This allows you to access liquidity without having to sell your ETH holdings.
MakerDAO charges low transaction fees compared to traditional financial institutions. This makes it a cost-effective option for those who want to borrow DAI or participate in the platform's governance.
Overall, MakerDAO offers a decentralized, transparent, and stable platform for borrowing and lending. Its unique features, such as collateralization and low fees, make it a popular choice for those looking to access liquidity without selling their cryptocurrency holdings.
Risks of MakerDAO
Although DAI is designed to be stable, it is still subject to the volatility of the cryptocurrency market. If the value of ETH drops significantly, the value of DAI may also drop, putting your collateral at risk.
If the value of the assets you put as collateral drops too much, MakerDAO might sell them to protect their system.
MakerDAO is a complex system that requires you to understand how smart contracts and collateralization work. This can be difficult for newbies to understand without proper research, and mistakes can result in the loss of collateral.
How to Get Started with MakerDAO
MakerDAO is technology, to use this platform, you must engage with decentralized applications (DApps) that are constructed on the MakerDAO protocol.
Oasis is a decentralized application (DApp) that operates on the MakerDAO protocol. It allows you to lend and borrow DAI stablecoins. By accessing Oasis, you can securely interact with the MakerDAO system and participate in its lending and borrowing services.
- First, connect your wallet: Open this page. Connect your wallet with Oasis. You can use a compatible wallet like MetaMask or Coinbase to connect.
- Second step is to deposit open vault: Once your wallet is connected, you'll need to open vault and deposit your collateral. MakerDAO accepts Ethereum-based tokens which are approved by it. Let's say we deposit ETH as collateral.
- Generate DAI: After you've deposited your collateral, you can generate DAI. This is the process of creating new DAI tokens by locking up your ETH as collateral. The amount of DAI you can generate is determined by the value of your collateral and the stability fee.
- Last step to get started with MakerDAO is to use your DAI: Once you've generated DAI, you can use it just like any other cryptocurrency. You can send it to other wallets, use it to pay for goods and services, or lend them on Oasis to earn interest.
MakerDAO is a powerful tool for those looking to borrow or lend cryptocurrency. Its decentralized and transparent nature provides a unique value proposition for you. However, it's important to consider the risks associated with the platform, such as liquidation and black swan events, before getting involved. With proper risk management and a clear understanding of the advantages and risks, MakerDAO can be a safe place for you.
Frequently Asked Questions
1. How is the value of DAI maintained at $1 USD?
The value of DAI is maintained through a system of smart contracts and incentives that encourage persons to trade DAI for other assets at a value of $1 USD.
2. What assets I can use other than ETH as collateral on MakerDAO?
You can deposit ETH, USDC, BAT, WBTC, MANA, TUSD, USDT, COMP, LRC and LINK as collateral on MakerDAO to generate DAI stablecoins.
3. What is MKR token?
MKR is a governance token that lets you participate in the MakerDAO platform's decision-making process. With MKR, you can vote on proposals for changes to the protocol. It's worth noting that MKR holders have a crucial role in maintaining the stability of DAI by participating in MakerDAO's liquidation and auction system to ensure the value of collateralized assets backing DAI.
4. How to get help for MakerDAO services?
5. Who was behind MakerDAO?
MakerDAO was established by a Danish entrepreneur named Rune Christensen back in 2014. Then, on December 18, 2017, the stablecoin DAI and its smart contracts were officially launched on the main Ethereum network. But now, its govern by MKR token holders 100%. You can learn to participate in MakerDAO governance on their forum.