What is Maker DAO?

Maker is a decentralized autonomous organisation striving to develop technology for borrowing, savings, and a stable cryptocurrency on the Ethereum blockchain. 

The Maker Protocol and Dai are key components of today’s thriving DeFi landscape, offering a decentralized, programmable stablecoin to anyone with an internet connection.

It facilitates lending and borrowing cryptocurrencies on the Ethereum network.

How does it work?

Maker DAO helps to deal in DAI token and MKR token. It offers financial freedom without volatility.

 It has created a protocol allowing anyone with ETH and a MetaMask wallet to lend themselves money in the form of a stablecoin called DAI. By locking up some ETH in MakerDAO’s smart contracts, users can create a certain amount of DAI–the more ETH locked up, the more DAI can be created. When users are ready to unlock their ETH, which serves as collateral for their DAI loan, they simply pay back the loan along with any fees.

MakerDAO has created a core layer of the decentralized financial system on Ethereum.

Core Foundation Principles of Maker 

Maker’s Foundation principles play a very important role. It can be seen from the founding principles that Maker envisioned full decentralization since its early days.

Scientific Governance

The maker framework is precise and absolute as it is built on Scientific models developed by experts. This framework entails two primary components-

Governance Proposals

The first component is Governance proposals. These are the symbolic votes used to poll the community sentiment towards specific models or data sources.

Executive Proposals

These proposals are quarterly and result in state changes inside the Maker Protocol.They are used to ratify the Parameters determined by the models and data accepted by Governance Proposals.

In this model, neither the MKR holders nor the Maker Foundation will have any special powers to arbitrarily dictate the risk parameters of the system, they can only affect changes through fact-based, provable, scientific arguments.

Serving The Underserved

This principle focuses on Dai adoption in emerging markets to recognize the tremendous opportunities for growth.This can be achieved through the application of the “triple bottom line” which is a financial concept that defines business success as the betterment of humanity in general through “profit, people, planet.”

By aligning with these ideals, they prioritize the growth and adoption of Dai in emerging economies to accelerate Dai’s entrenchment in the global marketplace.

Sustainable Finance

Since, the development of the Dai collateral portfolio can have a significant impact on global capital allocation, it is crucial that governance of the collateral portfolio should take long-term societal, environmental, and sustainability impact into account.

Sustainability is one of the primary concerns of the maker foundation.

Gradual Decentralization

Since its inception, the maker foundation is committed to total decentralization. This being Maker’s long term goal,the Foundation will drive Maker towards enhanced decentralization, with every step opening up more aspects of governance to community control.

Adopting DAI

Maker foundation aims to drive growth and promote the adoption of Dai Thus, it needs high levels of flexibility and more control in the short term.

The Foundation facilitates exponential user growth, business adoption, and dapp integrations to maintain the dominance of Dai across all markets for decentralized stablecoins.

MKR Token

MakerDAO is an ERC-20 token native to Maker protocol. It is a prerequisite for claiming a membership in MakerDAO.

Token creation and distribution

• MakerDAO was launched with 1,000,000 MKR tokens at its inception. The tokens are created and destroyed under different circumstances. 
• MKR is destroyed when the Maker Protocol’s system surplus exceeds a minimum threshold, resulting in excess Dai being auctioned for MKR that is then destroyed. 
• Inversely, when the Maker Protocol is running a deficit and the system debt exceeds a maximum threshold, MKR is created and auctioned for Dai in order to recapitalize the system. 
  

Uses of MKR token 

Governance and Voting

The MKR token plays a pivotal role in the governance system of the DAO. As a governance token, MKR is used by its holders to vote on a number of different things.Voting is used to execute changes to parameters inside of the Maker Protocol like Stability Fees, the DSR, Debt Ceilings, and many others. Voting is also used to make decisions on the non-technical aspects of the protocol like asset priority lists, governance processes, role mandates, and even electing individuals to fill specific roles.

MKR holders have the ability to enact technical changes to the Maker Protocol itself and also to ratify decisions on-chain about non-technical matters.

Whether that be a change to the system parameters, or a decision to accept a new governing philosophy, MKR voters have ultimate control.

Recapitalization

The token also acts as a source of recapitalization when the Maker Protocol runs at a deficit.

The possibility of MKR token supply Dilution gives holders a strong incentive to govern the system well.

Maker Foundation and MKR Token Holders

Maker foundation is the central entity that created DAI, the stable coin. From the early days Maker foundations has been moving towards complete decentralization and giving control to the MKR token holders.

Maker Foundation 

• The primary task of The Maker foundation is to consistently revive and bootstrap the system to ensure that it can survive as a fully decentralized organization.
• The Maker Foundation employs people to develop the strategies and manage the tasks required to build enough momentum so that MakerDAO can successfully thrive on its own. 
• In accordance with the Foundation Proposal, decentralization is a top priority and is ongoing. The Maker Foundation is responsible for regular updates on progress being made towards decentralization.
• It’s important to note that the Foundation does not occupy a privileged position within the community.

 The Foundation is prohibited by its corporate charter from voting in MakerDAO governance.

MKR Holders 

• MKR Holders refer to the people who own the native token of Maker. They collectively manage the governance of the Dai Credit System. 
• They exercise control through voting rights that come with the MKR token.
• They hold meetings via various diverse forums to discuss and debate everything from collateral types to Emergency Shutdown. 
• Their educated and balanced guidance is central to the health, survival and ultimate success of the Dai Credit System.
  

MakerDAO goes fully Decentralized! Foundation to dissolve…

The Maker Foundation has announced it is turning over operations entirely to its decentralized autonomous organization (DAO), MakerDAO. Just as founder Rune Christensen promised, MakerDAO now has no central authority.

In the words of Rune Christensen-

"From the earliest days of Maker, everyone involved worked tirelessly to devise a framework for scientific governance and create an infrastructure for a new generation of open financial services that can be used by anyone, anywhere, anytime. We all hoped for success, but knew it would never be guaranteed. We realized that only a very independent, passionate, and committed Maker community could make success a reality in the end."

Christensen's ultimate vision has always been to include real-world assets as collateral. The intention of Maker foundation was always to decentralize gradually.

"The Foundation will formally dissolve within the next few months," Christensen wrote in a blog post.

With the global community now responsible for every aspect of the Maker Protocol, the DAO is now fully self-sufficient and the Maker Foundation has fulfilled its bootstrapping responsibilities. 

The Foundation will formally dissolve within the next few months.  Maker has come a long way in a relatively short period of time. It’s gone from being a DAO to a Foundation and back to a DAO.  While the Foundation played a significant, crucial and critical role in the further development of the Maker Protocol and the growth of the global team and community, it was designed to exist only temporarily.  It was created to pave the way to an extraordinary end, a completely decentralized, community-owned, self-governed and self-operating DAO.  

The global Maker community embraced its governance responsibilities in a marvellous manner. People all over the world came together to discuss the consequences and viability of each concept, module, UX, and with every Executive Vote cast, took another clear-eyed step toward complete decentralization.  A keen observation and a critical judgement reveals that Maker has undertaken a slow, steady and sagacious transition from being a centralized foundation to a completely decentralized and an autonomous organization.

Timeline of MakerDAO

December-2014- Rune Christensen and Nicolai Mushegian founded Makers DAO with their team. It boasts of being one of the first decentralized autonomous organization launched on Ethereum Blockchain.

March 26, 2015- Rune Christensen introduced e-Dollar as the precursor to single- collateral DAI, which was built on a testnet for the upcoming Ethereum platform.

September 2018- world-renowned venture capital firm Andreessen Horowitz invested $15 million in MakerDAO to buy 6 percent of the total Maker (MKR) token supply.

November 18, 2019- Multi-collateral Dai was launched. This enabled anyone to generate a Dai against any of the digital assets in Maker Protocols’s diversified portfolio. The launch of MCD paved the way for the Maker foundation to accelerate its work towards long promised dissolution.

May 12, 2020- Single collateral Dai was shut down after a sequential governance process.

June 2020- As a result of the governance poll and the executive vote which took place in June, the MIPs were accepted by the members of MakerDAO.

December, 2020- With 900 integrations and 17800 vault openings, total Dai of makerDAO reached 1.073 billion in December, 2020.

MakerDAO Governance 

Proposal Specification

Proposals are one of the most crucial elements of a DAO. In Maker DAO, the proposals consist of two forms- Proactive and Reactive.

Let us explore both of them.

Proactive Proposals

Proactive proposals create something new for the system. They have a timing element attached to them. The timing suggests the regularity of the proposals.

Proactive proposals generally occur once and are solitary in nature. Regular proposals relate to the structural maintenance of the system, the structural elements that contribute directly to the stability and integrity of the system. These proposals need to go for a governance poll.‍

REACTIVE PROPOSAL

The reactive proposals alter what has already been implemented in the system. Their function is to respond to a state change in the system. For instance, any alteration in the collateral types, liquidity rates etc. is done via reactive proposals.

Membership criteria

Maker DAO entails a token oriented approach for membership. The candidates holding MKR (maker) tokens become the members of the MakerDAO.

Incentives for DAO members

Maintaining stability 

The members possess voting power and play a pivotal role in deciding the stability fee and related issues. This assists in the stability maintenance. Moreover, another significant phenomenon is associated with this voting. If, as a result of voting, the stability fee is to be increased , the potential users won't prefer DAO and incase it is to be decreased it may result in loosing out potential profit.

Decision making power

The MakerDAO members exercise the decision making authority and immensely influence the working and other prospects of the DAO.

Voting rights

MKR holders can vote on governance decisions such as how high to set fees and which collateral types can be accepted as collateral by the protocol. In the MakerDAO system, one MKR token equals one vote so people or organizations with large MKR holdings can have a large influence on voting outcomes.

Community Participation

The members get to be a part of the dynamic, diversified and like minded community of the MakerDAO. Also, they can participate in discussions and meetings too.

Avail lending and borrowing facilities 

The members avail the exclusive opportunity to borrow and lend crypto based liquid funds in the MakerDAO platform.

Since holders of MKR benefit financially from a stable MakerDAO system, they are incentivized to act in the best interest of the MakerDAO protocol.

Off chain and On chain governance

MakerDao being a dynamic platform offers both on-chain and off-chain governance. Let us examine and analyse each of them in depth.

Off chain governance

This form of governance in makerDAO supports the on-chain governance. This is done by providing a process for assembling feedback prior to proposing on-chain votes and making decisions that don't require on-chain voting.

Forum Signal Threads

Forum Signal Thread occurs in the MakerDAO forum to measure the sentiment of the public governance community. Anyone can create a signal thread to get feedback on their ideas to take action on an issue or improve the MakerDAO community.

Forum Signal Threads are used to:

• Measure community sentiment about issues affecting the MakerDAO ecosystem.
• Determine consensus that something needs to be done in response to a perceived issue.
• Determine consensus for a concrete action to be taken in response to a perceived issue.

On chain governance

Governance Polls occur on-chain and can be accessed through the Maker Foundation's Voting Portal.

Governance Polls measure the sentiment of MKR voters (participants who hold the maker token), and are used to:

• Form consensus on important community goals and targets.
• Measure the sentiment on potential Executive Vote proposals.
• Determine governance and DAO processes outside the technical layer of the Maker Protocol.
• Ratify governance proposals originating from the MakerDAO forum signal threads.
• Determine which values certain system parameters should be set to before those values are then confirmed in an executive vote.
• Ratify risk parameters for new collateral types as presented by Risk Teams.

Voting

Executive Votes 

This is a unique mechanism in MakerDAO. Executive Votes "execute" technical changes to the Maker Protocol. When active, each Executive Vote has a proposed set of changes being made on the Maker Protocol's smart-contracts. Unlike the other types of votes, Executive Votes use a 'Continuous Approval Voting' model.

Executive Votes can be used for-

• Adding or removing collateral types.
• Adding or removing Vault types.
• Adjusting global system parameters.
• Adjusting Vault-specific parameters.
• Replacing modular smart contracts.
  

Governance and Executive Voting

Both the proposals need to go through a voting process for confidence increasing purposes.  The proposal needs to be considered, accepted, and resolved as being necessary for the system. Resolution is achieved through a successful Governance poll, This resolution signals the general intent of the MKR token holders. 

Time based governance polling

The period of consideration and voting has a predetermined length. At the end of the voting period, the result (yes or no) with the most votes wins.

A proposal open for a Governance poll will have a period of consideration after it has been submitted.

Consideration is followed by a period of voting, a period that is open to receive votes of yes or no. Regardless of the outcome at the end of the voting period, the result will be recorded in the Governance system. If the proposal does not garner enough positive votes it will not pass and shall remain visible in the system reflecting the percentage voted against it. If for some reason the proposal is not sufficient to go to a vote it may be withdrawn. Either way, a new proposal may be submitted and the process started again. 

Continuous executive voting

The Executive Vote represents the state of the system.At any time a competing proposal to the system could be introduced. If MKR token holders do not agree with the new proposal they need to cast their vote for the current state of the system, implying that they do not want to see anything changed. The continuity of the system is emphasized in the fact that a new proposal could be submitted at any time by an MKR token holder.

Continuous approval voting

The system needs to be continually monitored and governed and thus the need for such a voting mechanism is needed. Continuous approval voting caters to this need. This is where continuity represents the existing state of the system which is frequently challenged and reinforced through ongoing movements of the majority of votes between desired new proposals and the most recent successful proposal.

The governance security module

Once an Executive Vote has passed, a delay period is observed. The period of delay is the main component of the Governance Security Module. Reviewing and consideration occurs in the back-end.  The newly voted upon code is encapsulated by the module before deployment to the system and held for final consideration for 24 hours. 

During this period all stakeholders may review the code. The purpose of the review is to ensure the integrity of the system and nothing else. If the code is reviewed and considered detrimental to the system, then the system will be shut down before it can be deployed.

What can we learn from Maker DAO?

MakerDAO has been the most widely used and one of the longest-running projects in Ethereum’s Decentralized Finance (DeFi) ecosystem. As of now they have about 2.3M ETH locked in their protocol, which is over 2% of the total ETH supply. Let us learn how MakerDAO managed to achieve this position!

Decentralisation from Day 1

Maker foundation aimed at decentralization since its inception. The team worked effectively and systematically to turn their aspirations into reality. As of now, MakerDAO is a completely decentralized organization. We can observe that Maker has made a slow, steady, structured and systematised transformation from being the Maket foundation to a completely decentralized and an autonomous organisation i.e. MakerDAO. The vision and horizon of MakerDAO was farsighted and inclusive since the commencement of the organization. MakerDAO is one of the first DAOs incorporated. It boasts of being one of the pioneers in the DAO movement.    

Systematised, effective and decentralized governance

The makerDAO implements and executes the governance mechanism quite effectively, efficiently and dynamically. Here, the governance and voting model is based on the ownership of MKR tokens. MakerDAO encourages regular intellectual discussions in Discord, telegram and other platforms. They also acquaint and apprise their members and potential investors about the recent developments.

Reference links

https://blog.makerdao.com/makerdao-governance-risk-framework-part-3/

https://forum.makerdao.com/t/sequential-process-for-scd-shutdown/1823

https://blog.makerdao.com/makerdaos-year-in-review-2020/

https://blog.makerdao.com/a-brief-history-of-decentralized-finance-defi/

https://decrypt.co/resources/makerdao-guide-learn-explained-decrypt-3-minutes

https://blog.makerdao.com/little-known-facts-about-makerdao/

https://www.coindesk.com/tech/2021/07/20/makerdao-moves-to-full-decentralization-maker-foundation-to-close-in-months/

https://blog.makerdao.com/foundation-proposal-v2/

https://makerdao.com/en/whitepaper/#the-dai-savings-rate

https://medium.com/pov-crypto/evaluating-mkr-def6d36092bd

How DAI and MKR works

On chain governance

Off chain governance