Maker DAO (MKR) – Replacing Central Banks
Central banks are the most powerful financial institutions in the world, as they can dictate the course of the economy through interest rates and other monetary policy tools. But is there any community-driven alternative that can challenge them? The answer is yes, and Maker DAO believes it has that answer, although there is still a long way to go.
Bitcoin came as a money system alternative after the major financial crisis in 2008, but it eventually turned into a store of value asset like gold rather than a means of exchange. Thankfully, the technology underlying it has way more to offer. Blockchain has been packed with many great features, such as smart contracts, which makes it suitable for even more use cases.
Decentralized Finance (DeFi) is the trend that truly demonstrates blockchain’s capability of empowering communities to create self-sustaining economies. Maker DAO is considered one of the most successful DeFi projects that take the most out of blockchain.
How Does Maker Work?
In a nutshell, Maker is a lending platform, but it is different from other DeFi lending protocols in that it has its proprietary stablecoin that is totally decentralized. Maker’s unique approach is what’s making it act as a central bank, but … it’s decentralized, if that makes sense.
The protocol is governed by MakerDAO, a decentralized autonomous organization (DAO) that relies on user voting to decide the roadmap. The software is running on Ethereum and is focused on DAI, the stablecoin pegged to the value of the US dollar. Unlike other stablecoins issued by centralized entities that keep the fiat counterpart in reserves to maintain a stable value, DAI addresses the volatility issue of cryptocurrencies as a combination of crypto assets deposited by users as collateral and a series of mechanisms implemented by Maker to keep the ecosystem fully independent and community-driven.
Specifically, DAI is created when a Maker user locks a cryptocurrency, like ETH, in the Maker platform to borrow the stablecoin. Users can return the DAI to claim their cryptocurrency, but they should make sure its value doesn’t fall below a certain limit or it could be automatically sold.
The MKR Token
Besides DAI, the Maker ecosystem operates another token, called MKR, which has a fluctuating price that is determined by market factors, such as activity on the protocol and demand from investors. MKR is a governance token, which makes holders responsible for governing the protocol by voting to adjust policy for DAI, introducing new collateral types, and improving governance itself.
MKR and the DAO model are helping Maker stay decentralized while offering the functions of a central bank, which is to issue and maintain a stable currency to ensure a healthy economy.
Thanks to this unique model, Maker has managed to grow rapidly – now it’s the second-largest DeFi project with a total value locked (TVL) figure at a record $17.82 billion. This collateral is mostly used to maintain the stability of DAI, whose market cap is currently near $6.5 billion.
MKR to USD Chart. Image via coinmarketcap.com
Interestingly, earlier in October, France’s third-largest bank, Societe Generale, made a collateral onboarding proposal to submit bond tokens as collateral for a $20 million loan in DAI. This historic proposal may become the first collaboration between a major traditional bank and a DeFi protocol.
The French bank called it the “first experiment at the crossroads between regulated and open source initiatives”, and it reflects the power of DeFi and the potential of Maker in particular.
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