Maker and DAI,truly decentralized stablecoins are here

MKR prices
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What is MKR?

MakerDAO is considered one of the most important startups in the  cryptos space. It is a decentralized toolkit for creating a stable token, allowing you to maintain the value of a certain price threshold, guaranteed by the design of the mechanism. In other words, it means that with MakerDAO you have a token that is protected from rigid volatility of the rate.

 

Such a stable token, for example, will always cost exactly $1, which will allow people to store their funds in such stable tokens instead of risks that have recently touched the seemingly immobile giant Tether (USDT).

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And like many of the best blockchain projects, Maker (MKR) is inherently complex and therefore requires a detailed explanation to fully understand.

MKR is a token utility with a small feature. To understand what this is, you first need to know what a stablecoin is, and how the MKR token, along with Dai, fit into this broad definition.

What’s a Stablecoin?

In short, Stablecoin is a type of cryptocurrency with a fixed value.

In the case of Dai, disguised as Maker, this is a token that is expressed in the U.S. dollar starting at $1. That is, this means that Dai has a soft peg of 1: 1 USD (but not permanently pegged to the US dollar).

Until now, most stablecoins have worked similarly to debt documentation. That is, stablecoin developers hold exactly 1 dollar for each coin issued. However, critics perceive this as a erroneous protocol, since coins in fact in this case are bills that are very similar to the currency.

This leads to the fact that the coin becomes more centralized and depends on government-controlled currencies – a result that is not at all similar to most decentralized cryptocurrency platforms currently operating in the cryptocurrency market.

Fortunately, Dai exists as a stablecoin that does not depend strictly on any other currency, and MKR is a volatile management token.

How does Maker platform work?

Maker is a decentralized autonomous organization built on Ethereum, where the MKR token works with Dai.

This is a great example of how many impressive products and services people can create using the Ethereum smart contracting platform. In fact, Maker exists to reduce the volatility of the Dai price against the US dollar.

For example, when you create 100 Dai coins with your $150 ether, the ether will be tied to a secured debt position (CDP), which is basically a program that allows a smart maker contract to set aside your capital.

Once you exchange your 100 Dai coins, you will be paid an ether, costing $150, but Dai will be “burned” as part of the process.

How does the MKR token work?

Now that we understand the basic message of the Dai token and how it all works, we can take a closer look at how the MKR token fits into the picture.

Maker operates as a management token or token utility, which also functions as a recapitalization resource for the Maker network.

The utility aspect of MKR is based on the concept that it is the only token that can be used to pay the fees for creating a CDP to create Dai. In fact, there are about 530,000 MKR in circulation, and whenever they are used to pay fees, MKR is spent and burned.

As more and more MKR is burned, its value will increase and less time will be required to complete transactions.

Maker platform process

Any user who has warranty assets can generate DAI.

Collateral assets are then cryptographically blocked within the DAI Stablecoin system. The dai-denominated debt and collateral are blocked in a smart contract called Collateralized Debt Position (CDP). The guarantee can only be recovered if the CDP user pays the CDP debt, burning an equivalent amount of DAI. CDPs are the property of Ethereum accounts, and can be freely transferred to other users like any digital asset.

However, CDPs are not fungible with each other.

Immediately after generating DAI through a CDP, the user of the same will sell it on the market to regular users who seek stability and who demand DAI for use as money. Therefore, CDP users are not interested in price stability. Instead, they seek leveraged exposure to assets used as collateral in their CDP.

The solvency of the DAI Stablecoin System is protected by a set of Risk Parameters, which are directly controlled by the holders of the MKR digital asset through voting – an MKR gives a vote.

The stability of the DAI around Target Price is maintained through a fully automatic subsystem, known as the Objective Rate Feedback Mechanism,which continuously modifies incentives to generate and maintain the DAI. This feedback mechanism dampens DAI volatility and allows you to maintain liquidity even during demand crises.

As such, DAI is not a linked currency: it does not maintain a constant link to an existing fiduciary currency.

Rather, it is a free float currency that experiences low volatility compared to other currencies, comparable to the volatility of major currency pairs, such as USD versus EUR

The management aspect of MKR is based on its use for voting. MKR owners can vote for any solution proposed to modify the Maker network, or to create such proposals.

Voting is held regularly, and the proposals put forward are usually related to risk and safety controls. There is also a delay between voting results and implementation to prevent mass MKR purchases for malicious voting. In this sense, MKR can be seen as a stock and property in the Maker community.

Maker also relies on its community of MKR owners to implement a privacy policy and acts on the assumption that they will use common sense. This is where the final aspect of MKR as a recapitalization token comes into force.

If the Maker does plays a bad role as a management tool, there will be an automatic recapitalization, which will result in insufficient collateral support for CDP. In such cases, the Maker system will create additional MKR tokens that will be sold, which will attract capital for additional collateral. As a result, MKR is diluted and its value drops.

Avoiding such an outcome is an incentive for all MKR holders to play their role correctly, because if this does not happen, their position on the MKR network will lose its value.

Dai vs Tether

Similarities

Price – both cryptocurrencies are pegged to the price of one US dollar in the form of a transition (soft peg) exchange rate regime

Asset type – both cryptocurrencies are assets that require collateral

Extractability – the emission of both cryptocurrencies does not involve mining

 

Differences

Mortgage – Tether is backed by U.S. dollars in proven bank reserves, while Dai is backed by over-secured Ethereum smart contracts.

Price stabilization – Tether’s price is based solely on the owner’s ability to exchange one Tether for $1. Dai’s price is pegged to US$1 using external market factors such as  Collateralized Debt Position (CDP), autonomous feedback mechanisms and external economic incentives.

Blockchain – Tether is issued in the Bitcoin blockchain through the Omni Layer protocol, and Dai uses the Ethereum registry.

Decentralization – Tether is de facto centralized because it can only be created or destroyed by Tether Limited. This has a negative impact on the reputation of the project in the crypto community. Dai, on the other hand, is more decentralized because this cryptocurrency can only be created and destroyed by individual users.

How to buy MKR

DAI and MKR are listed on most major exchanges and shouldn’t be a problem to swap them for other cryptos or even Fiat.

Conclusion

Maker can become a true cryptocurrency, in the very original meaning of the word. This token is conveniently suited as storage with confidence in protection against sudden rate jumps, as well as for a simple payment tool in the ethereum ecosystem.

 

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