MakerDAO is one of the most influential projects in the decentralized finance (DeFi) ecosystem. At its core, MakerDAO is the protocol responsible for maintaining the stability of DAI, a widely used decentralized stablecoin pegged 1:1 to the U.S. dollar. What sets it apart from traditional stablecoins is that DAI is backed not by fiat reserves, but by crypto assets—primarily Ethereum (ETH)—held in smart contracts. This innovative approach eliminates reliance on centralized institutions, enabling a trustless, transparent financial system.
But because crypto assets like ETH are inherently volatile, maintaining DAI’s peg presents unique challenges. MakerDAO addresses these through a sophisticated system of incentives, governance, and risk management—all governed by its native token, MKR.
How Does MakerDAO Work?
MakerDAO operates as a decentralized autonomous organization (DAO), leveraging blockchain technology to maintain DAI’s stability without banks or intermediaries. It functions within the broader Maker Protocol, a DeFi system that uses a dual-token model—DAI and MKR—to create, manage, and stabilize the currency.
The Dual-Token System
- DAI: A decentralized stablecoin soft-pegged to the USD. Users generate DAI by locking up crypto collateral (like ETH) in smart contracts called Collateralized Debt Positions (CDPs), now known as Vaults. When users repay their DAI debt plus a stability fee, they regain their collateral.
- MKR: The governance token that gives holders voting rights on critical protocol decisions. These include adjusting risk parameters, adding new collateral types, and modifying system fees.
This structure ensures that DAI remains over-collateralized and resilient—even during market volatility.
Governance: How MKR Token Holders Shape the Protocol
The true power of MakerDAO lies in its decentralized governance model. Only MKR token holders can vote on official proposals, making it a community-driven system.
There are three main types of governance activities:
- Executive Votes: Final votes that directly implement changes to the protocol’s code. Once passed, these updates automatically take effect on the blockchain.
- Governance Polls: Non-binding polls used to gauge community sentiment before an executive vote is scheduled.
- Forum Discussions: Open discussions on the MakerDAO forum where anyone—token holders or not—can suggest ideas or debate proposals.
Voting power is proportional to the amount of MKR staked, not the number of voters. For example:
- If 10 people with 1,000 MKR each support Proposal A (total: 10,000 MKR),
- And 5 people with 5,000 MKR each back Proposal B (total: 25,000 MKR),
- Then Proposal B wins—despite fewer voters—because it has more token-weighted support.
This ensures decisions reflect economic stake rather than popularity.
DAI Savings Rate: Incentivizing Stability
One of the key tools MKR holders use to maintain DAI’s peg is the DAI Savings Rate (DSR)—a variable interest rate paid to users who deposit DAI into a special savings contract.
- When DAI trades above $1, MKR voters may increase the DSR to encourage holding, reducing circulating supply and pushing the price back down.
- When DAI trades below $1, they may lower or zero out the DSR to discourage saving and promote spending or selling, increasing demand.
Historically, the DSR has ranged from 0% to as high as 8.75% annually, allowing dynamic responses to market conditions. This mechanism plays a crucial role in stabilizing DAI without centralized intervention.
Why Does MKR Have Value?
Unlike fixed-supply tokens, MKR has a dynamic supply that expands or contracts based on system performance. This unique feature ties MKR’s value directly to the health of the Maker Protocol.
Two Key Mechanisms Drive Supply Changes:
- Surplus Auctions (MKR Burn)
When the protocol earns more in stability fees than needed to cover costs, surplus DAI is auctioned off. Bidders must pay in MKR, which is then permanently destroyed. This reduces total supply, potentially increasing scarcity and value over time. - Debt Auctions (MKR Minting)
If collateral value drops sharply and liquidations don’t cover outstanding DAI debt, the system runs a deficit. To recapitalize, new MKR tokens are minted and auctioned for DAI. This increases supply and dilutes existing holders—acting as a penalty for poor governance.
Thus, MKR holders are economically incentivized to govern wisely: good decisions reduce supply and boost value; reckless ones trigger inflation and devalue their holdings.
👉 Learn how tokenomics and governance shape the future of digital assets in real-world applications.
Who Created MakerDAO?
MakerDAO was founded in 2015 by Danish entrepreneur Rune Christensen, along with a team of developers. It was later formalized under the Maker Foundation, incorporated in the Cayman Islands.
Over the years, MakerDAO attracted significant institutional interest:
- In 2017, it raised $12 million from top-tier investors including Andreessen Horowitz, Polychain Capital, and 1Confirmation.
- In 2018, Andreessen Horowitz invested another $15 million.
- In 2019, Paradigm and Dragonfly Capital Partners contributed $27.5 million to support expansion into Asian markets.
Despite early centralization through the foundation, MakerDAO has progressively decentralized. As of recent updates, the Maker Foundation has dissolved, transferring full control to the MKR holder community.
Frequently Asked Questions (FAQ)
What is the main purpose of MakerDAO?
MakerDAO’s primary goal is to maintain the stability of DAI, a decentralized stablecoin pegged to the U.S. dollar, using crypto-collateral and community governance—without relying on banks or traditional financial institutions.
How is DAI different from other stablecoins?
Unlike centralized stablecoins (e.g., USDT or USDC) backed by cash reserves, DAI is over-collateralized by crypto assets like ETH and governed by smart contracts and MKR token holders—making it fully transparent and decentralized.
Can anyone create DAI?
Yes. Any user can generate DAI by depositing approved crypto assets into a Maker Vault. However, they must maintain a minimum collateral ratio or risk liquidation.
Is MKR a good investment?
MKR’s value depends on the growth and stability of the Maker Protocol. As DeFi adoption grows, increased usage could drive demand for governance participation—and thus MKR value—though it carries risks due to its dynamic supply model.
What happens if the collateral value drops?
If collateral falls below a threshold, the system automatically liquidates part of it to protect DAI’s solvency. Liquidation penalties also help cover potential shortfalls.
How does MakerDAO handle black swan events?
Through mechanisms like emergency shutdowns, debt auctions, and multi-collateral risk management, MakerDAO is designed to withstand extreme market crashes while protecting DAI’s integrity.
Final Thoughts: The Future of Decentralized Money
MakerDAO represents a bold experiment in decentralized monetary policy. By combining algorithmic stability mechanisms with community-driven governance, it offers a glimpse into a future where financial systems operate without intermediaries.
As DeFi continues to evolve, projects like MakerDAO will play a central role in shaping how value is stored, borrowed, and governed online.
Whether you're exploring yield opportunities, building on DeFi protocols, or simply curious about digital money’s future—understanding MakerDAO and MKR is essential.