DeFi apps are hot right now, so here’s all you need to know about Maker DAO and DAI(in 2 minutes)

Merunas Grincalaitis
2 min readJul 20, 2020

The Maker DAO Protocol is the company behind DAI, the most popular stablecoin ever created. Why is it so popular? Because it’s the most decentralized and transparent currency running on a blockchain. Yes, we have tether, usdc and many others. But non of them are as transparent as DAI.

Let me show you how the currency DAI works.

  • First, you deposit currency as the collateral in the Maker Vault. You can do that at Maker Vaults are smart contracts where you lock your assets to generate DAI.
  • The collateral can be ETH, BAT, USDC or Wrapped BTC (WBTC). When you deposit any of those coins, you get DAI.
  • The amount of DAI you generate will be about half the value of your collateral currency. There’s a simple reason for that: if your collateral drops sharply in value, keepers of the system will put your collateral for sale and you’ll lose your initial currency. That way the protocol doesn’t lose money.
  • You’ll have to pay a stability fee which is used to keep the protocol running. It’s very small and you can pay it at any time. It’s accomulated every block.

This process makes DAI one of the strongest currencies since every coin is backed by a valuable collateral. Even if a collateral drops in value, the others stay strong. Keeping DAI valuable.

The coins valid as collateral are approved by the Decentralized Autonomous Organization system. If you hold MKR, you can vote on those decisions. MKR is the Maker DAO governance currency.

You can pay at any point your stability fee. You can repay your DAI at any point and extract your collateral coin from the Vaults at any point. That’s the beauty of blockchain.

Also note that if your collateral is too risky, it will be liquidated based on a Liquidation Ratio. For instance:

Let’s say you use 1 ETH as collateral for 100 DAI. Which is the maximum allowed by the Vault. Considering that 1 ETH costs about 300 dollars, your liquidation ratio will be 300%. Each DAI coin is backed by 3 dollars worth of crypto.

There are bots called Keepers that monitor the price of DAI to balance it out by buying or selling DAI so that it always is 1 dollar in value.

That’s about it. There are many more topics to discuss about the protocol like the Oracle Security Module but they are not necessary to understand the main functionality of it.

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