MakerMaker is a smart contract platform ran on the Ethereum blockchain. The purpose of Maker is to create a stable coin called DAI which is soft pegged to USD at a 1:1 ratio through smart contracts.
What is Maker?
Maker is a smart contract platform ran on the Ethereum blockchain. The purpose of Maker is to create a stable coin called DAI which is soft pegged to USD at a 1:1 ratio through smart contracts.
How does Maker work?
There are two native tokens on the Maker platform Makercoin (MKR) and Dai (DAI). The former is the governing token of the platform (price is volatile), the latter is the stable coin.
To create DAI on the Maker platform, a user will send a transaction to Maker to initial a Collateralized Debt Position (CDP). This could be understood as a smart contract that takes collaterals for the generation of DAI. The form of collateral accepted on the Maker platform is pooled ether. One could convert his/her ether into pooled ether.
Once the CDP has been created, user can generate CDP based on the amount of collateral there is in the CDP. As soon as DAI has been generated, an equivalent amount of pooled eth would be locked away until the outstanding DAI has been repaid. In order to release the collateral, the user would need to repay the debt in DAI and any associated interest in MKR. The value of DAI is kept at closed to US$1 through the built in market mechanism.
MKR token on the other hand is used for 1) payment of fees accrued on CDPs. MKR is burned when it is used to pay fee; 2) for voting and governance purposes on the platform; & 3) In the event that pooled ether loses its value and the collateral portfolio becomes under-collateralised, MKR would be generated and sold at market to recaptialised the collateral pool.
It is worth noting that the value of DAI fundamentally depends on the value of the collateral. In an extreme event where the collateral loses its value sharply, the price stabilizing mechanism could break down.