Maker's mechanism is not simple, and this is in harmony with Maker's grand vision. We not only develop and provide the largest decentralized stablecoin Dai, but also realize an unprecedented experiment: blockchain Decentralized "central bank" on .
The author is an economist and head of China at MakerDAO
When I introduced MakerDAO to everyone, the first reaction of many people was: "Maker is a great project, but it's too complicated to understand."
Indeed, the mechanism of Maker is not simple, and this is in harmony with the grand vision of Maker. We not only develop and provide the largest decentralized stablecoin Dai, but also realize an unprecedented experiment: the district Decentralized "central bank" on the blockchain .
Regarding the mechanism of Maker's stable currency Dai, Gregory DiPrisco once gave an introduction to it: Let the public understand Maker: A popular explanation of the DAI stable currency .
In this article, I will give a more detailed explanation of the overall mechanism and principle of Maker. I hope you can have a relatively clear understanding of the Maker mechanism after reading it.
Dai: Generation Mechanism
Maker is a smart contract system on Ethereum, providing the first decentralized basic stable currency Dai ( which can be simply understood as the dollar on Ethereum ) and a derivative financial system. Dai is issued through a full mortgage of digital assets, 1 Dai = 1 USD . Since its launch in 2017, Dai has remained pegged to the U.S. dollar.
First of all, for ordinary users, if you just want to use Dai as a stable currency, you don't need to understand the mechanism behind Dai, you just need to exchange Dai on the exchange and use it as USD (Dai is ERC20).
For advanced users or users who want to generate (borrow) Dai, I will introduce the complete process of generating Dai's smart contracts ( you can visit dai.makerdao.com for operations ):
Suppose you have some encrypted digital assets, such as Ethereum. You don't want to sell ether, but you need a liquid cash to spend or invest in more digital assets.
- You lock $1,500 of ether into a smart contract (Collateralized Debt Position) as collateral.
- According to the risk parameter of this collateral (2/3 discount), 1000 Dai, or 1000 USD, can be generated.
- Exchange Dai for USD or invest in other assets.
- When you need to get back the collateral (Ether), repay 1000 Dai and very low interest (paid in MKR, currently 0.5% annualized), get back the Ether and keep the gains (from the rise of Ether or the investment in Dai) income).
Dai: How is it stable?
You might ask: what keeps the price of Dai stable if the price of ether drops?
Dai is always over-collateralized, which means that there is always sufficient assets behind Dai.
If the price of the asset rises, then Dai will be more secured. If the asset falls to a certain value (the original CDP opener did not make a margin call or repay Dai), the contract will automatically start liquidation. Any user can liquidate under-collateralized assets and receive a risk-free return of 3%. This also motivates many market participants to play the role of Keeper in Maker, they can not only benefit from the system, but also protect the repayment of Dai.
In addition, the system also has a mechanism of "lender of last resort" and global liquidation (Dai holders can redeem assets equivalent to USD) to protect the stability of Dai. Several market slumps since 2018 have had no impact on the stability of Dai. At the same time, the upcoming multi-collateral guarantee (including e-gold) will diversify the asset portfolio behind Dai to a very large extent, fundamentally spreading the risk of Dai.
Dai: landing application
One of the most frequently asked questions about Dai is: What is the difference between Dai and USDT?
**What USDT can do Dai can do, and many things that Dai can do USDT cannot do. **I once wrote an article detailing the risks and limitations of USDT and similar stablecoins. Compared with USDT, in addition to being openly audited, fully transparent, and decentralized, Dai also gives users and institutions new opportunities. the value of.
In addition to being a safe-haven asset for the base currency of exchanges, Dai can be used as a mortgage loan, and someone bought a car and opened a coffee shop with Dai.
True blockchain-based features give Dai the advantage of low-cost margin trading:
In a decentralized ecosystem, Dai is not only the denominated currency on exchanges, but also a stable payment method used by dAPP by default. For example, Augur predicts that the market will use Dai as the main betting currency to avoid the volatility risk of betting tokens themselves. The case is applicable in almost all decentralized business scenarios.
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Cross-border transfers and supply chain finance will be a great application of Dai connecting the real economy. Tradeshift, an international supply chain company, uses Dai as a payment method and is exploring the tokenization of bills for Dai financing. Dai and Wyre, a digital asset transfer company, have opened up the channel between digital currency and fiat currency. Previously, international transfers through Bitcoin and Ethereum can be carried out by Dai, which eliminates volatility. Instant exchange of RMB.
Maker: Decentralized Central Bank
So what is a Maker?
Maker is the entire system and decentralized autonomous organization (DAO) behind Dai. If you understand the meaning of Dai as a base currency, you will realize that Maker is actually implementing a decentralized "central bank".
From the early gold standard to the current modern banking system, the creation of money has evolved from the constraints of gold and deposit reserves to the direction of credit creation . This better accommodates the need for liquidity in the capitalist economy, but the trade-off between liquidity and transparency is always a dilemma, with too little transparency pushing systemic risks to the tail end.
The creation method of over-collateralization on the chain provides the currency market with liquidity that can be adjusted according to demand, and at the same time eliminates the risk of "printing money out of thin air", and there is a sufficient amount of assets behind the creation of each currency. At the same time, Maker has no counterparty risk and is subject to the influence of a certain sovereign policy. Dai is generated on the chain contract, and there is no risk of centralized custody. Even the Maker development team cannot tamper with and transfer users' assets.
This means that the Maker system needs sound governance.
MKR: MakerDAO's Stake Governance
MKR is the equity and management token of the Maker decentralized autonomous organization. MKR holders participate in the governance of Maker and obtain equity.
As an equity token, MKR's function is to pay interest. When users repay Dai, they need to pay part of the interest with MKR, and the paid MKR will be destroyed. That is to say, MKR holders will receive constant interest income in the form of repurchases.
At the same time, MKR is also the management token in the system. MKR holders vote to determine the risk parameters in the system, such as collateral selection, liquidation ratio, stability fee, etc.
The equity of MKR holders is closely related to the state of the entire Maker system, because good governance means continuous healthy expansion of the system and more cash flow. And poor management may lead to MKR issuing additional repurchase bad debts. This incentivizes MKR holders to manage the system prudently. For Maker's governance structure and risk framework, see: Decentralized Trust and Risk Management | Maker Governance Framework .
words written on the back
The emergence of Bitcoin is an attempt to realize a peer-to-peer electronic cash, but at present, this attempt is undeniably a failure. Bitcoin's volatile price prevents it from fulfilling the most basic function of a currency - a unit of account. This stems from a fatal flaw in Bitcoin’s design, imitating the fixed supply of gold, making Bitcoin a target for speculators. The deflationary nature of Bitcoin penalizes "lenders" (imagine you took out a Bitcoin-denominated loan a few years ago). The fixed supply design ignores that money itself is a transferable debt , and that money is created as a loan granted in response to demand.
This is also the origin of the name Dai - "loan" in Chinese. Dai is a transferable loan issued based on full assets, and its value is derived from the collateral assets behind it. Dai is pegged to the U.S. dollar because the U.S. dollar is currently the clearing currency of the global economy and the most widespread consideration on cryptocurrency exchanges. In the future, Dai can have derivatives anchored to EUR and JPY.
Stablecoins are a hot topic these days. The key issue with stablecoins is not their control over issuance or whether the algorithm is “advanced”. It lies in the asset governance behind it, the ecology it relies on, and people's trust in it.
Maker's mechanism is not an unrealistic detachment from reality. Our vision is grand, but we know that it must conform to the laws of the economy and be down-to-earth in combination with reality. We hope that by reshaping a monetary system, we can help those who do not have the opportunity to obtain traditional banking services. communities and individuals. I'm excited that we have the best team in the world, driving this goal every day.
The 'essence' of money is not in any external form it can be found in, such as a commodity, paper money, or anything else, but in the stable transfer of debt that underpins economic transactions.
--Schumpeter's "On Money"