Lots of stars are shining in the cryptocurrency sky, the brightest of which are, surely, Bitcoin and Ethereum. But these guys are not the only ones that are rocking the world of coins. There is another player that has created lots of buzz in the crypto community – Maker Coin aka MKR. It is, perhaps, one of the most complicated and abstruse crypto projects ever and bewilders many crypto enthusiasts as they are trying to research it. In this guide, we will get into the nitty-gritty of Maker Coin, explaining what MKR is, what it serves for, the relationship between MKR and DAI, and where to buy and store MKR tokens.
The Essence of a Maker (MKR) Coin
MakerDAO (also referred to as Maker Protocol or Maker Ecosystem) is a cryptocurrency platform established in 2015 on top of Ethereum blockchain. The primary goal of this project was to found a decentralized electronic currency that would be pegged to the value of real-world assets such as the US Dollar, Euro, Pounds, gold, etc. In other words, the Maker Platform aspired to design a so-called stablecoin that would effectively endure the trials of volatility, without losing its value.
Contrary to popular belief, the main cryptocurrency of the project is not the MKR token, but Dai stablecoin. Dai mirrors the value of the U.S. Dollar and is also the token that fuels MakerDAO, along with MKR. 1 Dai = $1.
The goal of Maker System developers was to launch a decentralized exchange, where users would be able to engage in margin trading of various cryptocurrencies on the ERC20 Protocol. Maker itself is a decentralized autonomous organization, which is why it is often dubbed MakerDAO.
There are several reasons why the MKR token was created. Firstly, MKR is required to attract investment funds in the project, and, secondly, MKR holders play the role of shareholders, being able to propose modifications to the ecosystem by taking part in voting. The voting power of an MKR holder is determined by the size of their MKR stake.
History of the Maker Project
In August 2015, Maker was declared “the first tradable token on Ethereum decentralized ledger”. To raise money, the project decided to issue MKR tokens for BTC and ETH through its proprietary cryptocurrency exchange to facilitate the launch of the Maker Platform that would take place later in April 2016. The project’s founder, Rune Christensen, a Danish entrepreneur, wanted to create a “centralized decentralized” bank for Ethereum that would be supported by a strong USD-tied asset.
This stablecoin became known as Dai and it came into being in December 2017. The Maker Platform managed to attract institution-grade sponsors. The trust of big investors resulted in significant price leaps, so that the project reached a multi-billion US dollar market capitalization in a matter of a few weeks.
Popular electronic coins like Bitcoin (BTC) and Ether (ETH) are too volatile to be used for everyday payments. Bitcoin’s value is subject to wild fluctuations, with its price rising or falling as much as 25% within a single day and sometimes surging more than 300% in a month.
Dai is a collateral-ensured virtual currency whose value remains stable against the US Dollar. It is believed that stable digital assets like Dai are essential to unleashing the full capacity of blockchain technology.
Maker is an Ethereum-powered smart contract platform that maintains and stabilizes Dai’s value through a dynamic system of Collateralized Debt Positions (CDPs), mechanisms of autonomous feedback, and properly motivated external actors.
MakerDAO allows anyone to leverage their Ethereum (ETH) savings to release Dai through the Maker Protocol. Once generated, Dai can be used just like any other cryptocurrency: you can transfer it to other people for free, use it as a payment for products and services, or hold it as a long-term investment. The generation Dai stablecoin also produces the essential components that are required to ensure a smooth function of the decentralized margin trading platform of MakerDAO.
Maker’s Smart Contract
Maker’s smart contracts are named Vaults and they are core components of the Ecosystem as they promote the production of new Dai units against locked up collateral.
The usage of vaults collectively influences the total supply of Dai. Maker’s members produce Dai by generating it against their Collateral and then burn Dai when completely paying off their debt. This process occurs within Ethereum Blockchain, which ensures full auditability of existing Dai units and collaterals that secure them.
Vaults must be over-collateralized and have a liquidation ratio that the vault owners must maintain to prevent the liquidation of their CDPs. Also, the debt ceiling is set globally for the Maker Protocol, as well as individually for every vault type.
In Maker Protocol, the debt ceiling defines the maximally possible amount of Dai that can be generated. There are two types of debt ceiling. The first is the global debt ceiling, which limits the amount of Dai that can be released throughout the system. The second is the vault-specific debt ceiling, which determines the amount of Dai each vault type can release.
Who can set up a vault?
It will depend on the vault type. While some vault types do not have permissions, others may have requirements. There are usually no requirements associated with a previous history of opening a CDP as vaults are configured based on the risk profile of the underlying collateral to be used. The vaults are owned by Ethereum addresses that create them and can be freely transferred between wallets. Vault owners have to a pay stability fee for their newly-minted Dai.
If the vault becomes insufficiently secured (under-collateralized), as indicated in the liquidation ratio of each type of vault, it can be liquidated and its assets will automatically be sold to cover created Dai. The liquidated vault also incurs a liquidation penalty on the generated Dai balance. Stability fees and liquidation penalties depend on the vault type.
As you can judge from the mentioned above, a vault is essentially a CDP.
The role of the MKR token is to help to ensure the stability of its partner stablecoin Dai, maintaining its value maximally close to 1 USD. MKR tokens can be produced and destroyed based on the movements of Dai price to keep the U.S. dollar value of Dai stablecoin. Dai employs a collateral system (a type of insurance) in which holders act as part of a control mechanism to help manage the network.
New Dai tokens are minted when a person purchases a collateralized debt position (CDP) within smart contracts called vaults. The whole process resembles taking a loan. A CDP is bought with Ether (ETH). It means that a person puts their ETH tokens and receives Dai in return. The amount of Dai you can issue depends on how much Ether you place in the CDP. This ratio is fixed but can be alternated over time. The amount of Dai to be minted concerning the amount of Ether to be deposited is known as the collateralization ratio.
In this scheme, ETH will act as the loan collateral, pretty as the house acts as collateral when you take a mortgage loan in a bank. The whole system means that everyone can obtain a cryptocurrency loan using their ETH savings as collateral. Once the debt is paid off, Dai tokens get burned, while all the fees that occur within the platform are made in MKR tokens.
But what is the role of MKR in all this stuff?
The MKR token is a lifesaver for the scenario when the ETH price drops so quickly that jeopardizes the solvency of the Dai system. If the collateral system is not sufficient to insure the value of Dai, then MKR is generated and sold in the market to provide additional collateral.
Issuance of Dai
Dai tokens are issued and used by the network members. To mint Dai stablecoin, a user needs to open a Collateralized Debt Position (CDP) by transferring their ETH assets to a special smart contract address. The procedure will look like the following:
- A user has to set up a CDP and send their ETH to a smart contract address that then converts regular ETH into so-called Pooled ETH (PETH). The received PETH then goes to a CDP, so the user can generate new Dai coins.
- After that, the user specifies the quantity of Dai coins to be received. At the same time, the proportional amount of collateral for the price is frozen in a CDP and cannot be used until Dai returns to the smart contract.
- To receive collateral, they must return Dai, after which Dai tokens get destroyed. The user gets their PETH back, which is then converted to ETH. In addition, the user pays a commission called Stability Fee.
The reason why people create CDPs is that by doing so, they take a margin position on ETH and, if its value surges, they will make a good profit. However, they can use generated Dai for other purposes.
Dai Price Stability
As a completely decentralized system, Dai requires a stabilization mechanism to tackle emergencies. There are three ways how Maker ensures the market stability of Dai.
If Dai’s price falls below one US dollar, this creates a natural demand from CDP stakeholders, who can thus return their collateral at a lower price. Thus, the value of Dai rises. If Dai’s price exceeds one US dollar, this drives up the demand for the formation of CDPs (which are opened on the condition of 1 Dai = 1 USD) with the further resale of Dai on the exchange with gaining some profit.
The second layer of Dai’s stability involves the use of a complex system that consists of such components as Target Price, Target Rate Feedback Mechanism (TRFM), and Sensitivity Parameter. This system is hard to describe. In a nutshell, these three components help to reduce the demand and the cost of creating Dai if its price significantly surpasses the required one, thereby stimulating sales. In the opposite case (when Dai price goes below the required level), the mechanism raises the cost of producing Dai tokens and stimulates users to keep them, increasing demand and boosting the price.
The third level of stability revolves around unforeseen situations for the scenarios when the value of ETH (or other asset used as collateral) drops too quickly so that the system cannot implement Global Settlement. In this case, the MKR stakeholders have to contribute their tokens to support the Maker System. The system issues new Dai coins and sells them on the market, doing the recapitalization and decreasing the value of coins for all holders. The ability to govern the system thus imposes a heavy responsibility on MKR holders.
As an added security measure, MakerDAO has the “worst-case scenario” process called “Global Settlement.” If there are some performance problems with the Maker Ecosystem, a group of people will have the settlement keys. These keys can be used to trigger a settlement in which collateral locked in the CDPs is transferred to the Dai owners in the equivalent of the ETH value.
Purposes of MKR
Maker (MKR) is the second token of the Maker Platform. It is an ERC-20-standard utility and governance token that exists within the smart contract of the Maker Ecosystem. MKR holders are allowed to engage in voting and make decisions about the adjustments and updates to the platform, so it remains solvent while Dai keeps being tied to the market value of the U.S. Dollar. If the Dai system cannot stay solvent, new MKR units are issued and sold to support the Dai fund. MKR is also used as a means of investment in the MakerDAO project.
While the value of Dai is almost always equal to one US dollar, the MKR rate is exposed to volatility, which provides an opportunity for traders to make good money by investing in MKR. Obviously, as Dai’s value reflects the one of USD, this token is not suitable for trading and capitalizing on its price swings.
Functions of MKR on the Maker Platform
- MKR tokens are necessary to pay fees for transactions and collateral redemption.
- Users owning MKR are allowed to decide on the platform’s future. The more MKR coins you have in your possession, the more weight your vote will have.
- Using the MKR token and sophisticated algorithms, MakerDAO developers succeeded to achieve fluctuations in the Dai value within 5%, which is awesome even for conventional financial instruments.
As it was already told, MKR stakeholders can partake in votes on the Maker Platform. MKR owners can decide on the risk management and business logic of the system, for instance, adjustments to the collateralization rate of CDPs. Participation in voting is properly rewarded (rewards are collected from MKR fees). That way, voting is beneficial for both MKR holders and the network itself. If the system functions seamlessly, MKR’s value remains on the same level or even increases. Bad governance leads to the devaluation of MKR.
If MKR holders are competent and manage the system wisely, CDPs will always have excess collateral and the system will not be threatened with insolvency. However, mistakes or unforeseen circumstances may occur, ending up with that collaterals become under-secured. When this happens, the recapitalization function of the MKR token will kick in: holders will automatically be deprived of MKR to provide recapitalization.
This means the Maker Platform will automatically generate new MKR units and sell them on the market, thus, instantly raising money to recoup the deficit in value in the system and restore it from insolvency. MKR holders are directly responsible for their actions as poor governance and bad decisions will revoke their own tokens.
Where to Buy MKR
MKR is a sought-after digital asset and is available on many online cryptocurrency exchanges, where main trading pairs are presented by MKR/BTC, MKR/ETH, and MKR/USD.
If you wish to invest in Maker Coin, you can buy MKR tokens with fiat, using your debit card. Crypterium is a free, yet sophisticated crypto wallet designed to provide a solution for all your cryptocurrency needs. It only takes a couple of minutes to sign up and set up your account with Crypterium before you can access dozens of popular virtual currencies and hundreds of cryptocurrency trading pairs.
An ultimate cryptocurrency wallet, Crypterium comes with an array of global services to let you make the most of your MKR tokens. Not only can you buy MKR with your debit card, but trade, send, spend, withdraw, and invest your digital assets, all within a simple interface. Surely, you can use Crypterium as a secure hot wallet for your electronic funds where your tokens will be insured by Crypterium’s strategic partners.
If you do not intend to hold MKR as a long-term investment, you can easily spend your tokens on real-world goods and services, thanks to the Crypterium Visa Card. It is essentially a classic (plastic, virtual, or both) Visa card that is connected to your Crypterium account. You can top up your Visa using funds from your Crypterium wallet and spend tokes like conventional fiat all around the globe, including online stores.
With Crypterium, the list of possible applications of MKR is no longer limited to buying, trading, and holding. By using this cutting-edge crypto software, you give your virtual holdings truly a full play, unleashing the potential of electronic currencies.
Where to Store MKR Tokens
Since Maker Coin is an ERC-20-standard token, you can keep your electronic possessions on any wallets that support this type of asset. This means that all Ethereum-friendly wallets can be used to store your MKR units, including cold-storage (hardware) solutions like Ledger and Trezor and hot (software) wallets like Crypterium.
Is MKR a Good Investment?
Given a tad overcomplicated organization of Maker Ecosystem, you may be wondering whether the project is set to thrive or doomed to fall into oblivion. Well, the Maker system is up and running, with thousands of people using DAI every day.
Maker Coin, with its quite small supply, is helped by fewer people, but these people have enormous influence, both financially and in terms of voting power on the Maker System. Whether you invest in Maker Coin or not depends on how you envision the future of this project. Do you consider this the number one stablecoin in the coming years, or do you think the cryptocurrency is too complex to be universally accepted?
Looking at Maker’s vision and execution, the team behind it consists of very serious guys, and this inspires trust. As always, it is only up to you to decide if Maker Coin is the right asset for your investment portfolio. A good rule of thumb is to do your own research and make the decision that will fit your life circumstances. However, if you do commit to buying MKR tokens, do not delay the purchase, while the price is still decreasing from its all-time maximum.
Maker (MKR) is the governance token of the MakerDAO, a decentralized organization existing on Ethereum blockchain. MKR allows for issuing and managing the DAI stablecoin. Started up in 2015 and fully launched in December 2017, MakerDAO is a project whose mission is to operate DAI, a community-governed decentralized cryptocurrency with a stable price soft-bound to the price of the U.S. Dollar.
Maker Coin is surely a robust and well-orchestrated concept in the world of cryptocurrencies that makes it possible for stablecoins like DAI to exist. Its future is hard to predict (like any other tradable asset), but the idea of stability in crypto space appeals to many investors. Those who decide to invest are likely to be generously rewarded as Maker Coin is gradually gaining acceptance while the cryptocurrency industry is evolving, too.