MakerDAO

MakerDAO is a peer-to-peer network that uses the ERC-20 token. It allows users to deposit Ethereum coins as collateral and access funds in return. This process of lending and borrowing depends on smart contracts. As the users deposit ETH tokens, the vaults lock them up and mine MakerDAO coin (or DAI). Here, the borrowing capacity depends on the collateral amount. The more ETH deposits, the more they can borrow. However, a specific interest rate is applicable on these loans.

As there are two coins, each performs different functions. The DAI token is responsible for maintaining the lending protocol. In short, it helps determine the lending and borrowing rates for debt. Thus, when ETH tokens are deposited in the vault, the collateral stays in the smart contracts. Users can get debt by creating a collateralized debt position (CDP) with these contracts via collateral. However, users can borrow only up to 66% of their collateral value. 

So, if a person deposits $500 ETH as collateral, the network mines Dai and transfers 200 tokens (as per the rate) to them. To reaccess the collateral, they must repay the Dai stablecoins and the stability fee. However, they must maintain a particular value of collateral within the MakerDAO vault. If the assets' value drops below the limit, the network will sell the collateral at a 3% discount rate.

The lending protocol needs another coin to create a safe and transparent environment for Dai stablecoins. Thus, the MKR token is another coin running parallel to the network. It allows holders to participate and vote in the MakerDAO governance. However, the central power lies with the maximum number of coin holders. Likewise, MKR holders can also reach a consensus on essential protocol updates.

Let us look at some examples to comprehend the concept better.

Example #1

Suppose Paul has been a crypto trader in the market for the past three years. In these years, he has gained enough experience in his field. But he required some funds to make a crypto payment to his friend. While most lending platforms only lend, Paul wanted to earn some interest on the collateral. So, he kept 200 ETH with the platform and received 140 Dai in return. Also, Paul deposited the excess or unused tokens in the vault, which gave him an interest of around 4%. After a few weeks, when Paul had enough funds, he repaid the Dai tokens with a fee. And in return, he got a variable interest for the time being.

Example #2

MakerDAO is set for a significant technological shift as co-founder Rune Christensen has proposed using a fork of Solana's codebase to develop a new native chain called "NewChain." This marks a departure from their traditional reliance on Ethereum and is part of its broader "Endgame" upgrade plan, which will take place over five phases. The final phase, expected to take around three years, includes the creation of NewChain. Christensen envisions a cooperative relationship with the Solana community, aiming to leverage Solana's optimized blockchain capabilities, including the establishment of a Two-Stage Gravity Bridge connecting NewChain to Solana and Ethereum. This move highlights MakerDAO's strategic shift to embrace multi-chain functionality and foster deeper integration in the DeFi space.

Christensen presented Solana as the ideal codebase for NewChain due to three key reasons:

• Its technical efficiency in operating a single blockchain
• The resilience of the Solana ecosystem
• The proven success of its codebase being adapted by other projects.

While the Cosmos SDK was also considered, Solana's combination of efficiency and cost-effectiveness made it the preferred choice. If approved by the community, this transition could have a significant impact on the DeFi landscape, further solidifying its influence in the space.

There are possible applications and use cases in the crypto world. Let us look at them.

• Loans 

Many users use this platform to access credit facilities and reduce vulnerability. Volatility and price instability are handled since Dai is pegged to the US dollar. Plus, excess tokens enable variable interest on deposits. As a result, a hybrid mechanism provides enormous benefits to borrowers and depositors. 

• Trade Cryptocurrency 

The MakerDAO coin generally has a primary use case of trading in the crypto markets. With the stability offered, the investors mitigate the financial risk associated with it. As a result, these tokens not only promote transparency but also enable the platform to adapt and evolve based on the consensus of its participants.

• Earning Interest

In addition, this network also acts as a global decentralized bank. The MakerDAO DSR(Dai Savings Rate) to deposit and withdraw Dai whenever required. Although MKR holders determine the DSR, the rate usually ranges from 0 to 8.75%. 

• Donation Purposes 

Many users use Maker's ecosystem to make donations and raise funds for a blockchain project. UNICEF, which stands for United Nations International Children's Emergency Fund, uses DAI as a token. It helps fulfill the needs of their social project. Donations to UNICEF also fund their ongoing research for infrastructure projects. 

• Gaming Industry 

Besides the application in the crypto market, a specific population of the gaming industry also uses MakerDAO tokens. Platforms like Cloudbet, Battle Racers, and Axie Infinity allow users to use Dai coin to buy equipment and create assets. In addition, it is possible to create NFT-based assets and artwork and earn rewards in return.

Although MakerDAO, Aave, and Compound provide lending facilities, they have distinct features. Let us look at their differences: