What is MakerDAO? | Chain Knowledge Encyclopedia

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1. Overview
   MakerDAO is a lending protocol based on Ethereum and also the issuer of the stablecoin DAI. It was established in 2014 and is one of the early adopters and pioneers of the Ethereum ecosystem. The protocol issues the DAI algorithmic stablecoin, which is soft-pegged to the US dollar. The Maker protocol allows users to borrow DAI by using Ethereum tokens as collateral, enhancing asset liquidity. The DAI stablecoin is the most widely used asset in the decentralized finance ecosystem, apart from Ethereum's token ETH. By providing a decentralized, composable, and stable value storage solution in DAI, MakerDAO has become a foundational pillar of DeFi.
   The stability of DAI is primarily achieved through an over-collateralization mechanism. When the value of the collateralized assets is less than 150% of the borrowed assets and no additional margin is provided, the system will initiate the liquidation of that portion of the assets to maintain the health of the platform.
   The founder of the MakerDAO team, Rune Christensen, was deeply involved in the BitShares community, and the head of its China region, Pan Chao, is also quite well-known domestically. In terms of financing, MakerDAO has received funding from well-known institutions such as Polychain Capital and a16z.
   MakerDAO is governed by the governance token MKR, and holders can regularly vote on governance proposals and implement them. As of April 12, 2021, DAI can be used in over 400 DeFi applications, and the MakerDAO protocol has locked over $8.2 billion, ranking second among all protocols on the Ethereum network. The market capitalization of the governance token MKR reaches $2.3 billion, ranking 46th among all cryptocurrencies.
   So, how exactly has DAI driven the rapid expansion of the DeFi ecosystem?
2. MakerDAO and DAI Stablecoin are Fully Decentralized
   MakerDAO's revolutionary contribution to DeFi is the creation of a fully decentralized, tradeable stable value storage medium. Here, DeFi users can use countless stablecoins, including USDT, GUSD, and USDC. However, these stablecoins are issued and controlled by a central entity responsible for asset reserves and issuance.
   MakerDAO provides a fully decentralized alternative for asset-backed stablecoins. Anyone can redeem or borrow DAI using the protocol, and no entity controls its issuance. Instead, the protocol is managed by holders of the governance token MKR, who vote on protocol management through the Maker Decentralized Autonomous Organization (DAO). The DAO votes on system changes, such as adjusting fees and adding types of collateralized loans. Although DAI is by no means the only decentralized stablecoin option, it is currently the most liquid and widely used one.
3. DAI Stablecoin Provides Stable Value Storage for DeFi
   The functionality of DAI in DeFi is multifaceted. To provide services like peer-to-peer lending, DeFi platforms must have low-volatility assets for trading. Issuing loans in Bitcoin or Ethereum would mean that the value of the loans could fluctuate with market volatility, leading to instability. DAI solves this problem with its stable value.
   Similarly, DAI is valuable for decentralized exchanges (DEX) like Uniswap, which are key facilities in the DeFi ecosystem. DEXs typically do not allow users to trade with fiat currencies, which can pose problems for traders looking to convert higher-risk assets into safer ones. If the underlying trading pairs fluctuate during the trading process, excluding fiat trading can also make it difficult for traders to track their profits.
   The DAI stablecoin provides a solution to these issues by offering a currency that tracks the value and stability of the US dollar, creating a hedge asset and low-volatility trading pairs in a decentralized manner.
4. The Composability of DAI
   One of the most important features of the DeFi ecosystem is its composability. Composability is a design feature that allows elements of a system to easily connect to and iterate on other systems. MakerDAO is highly composable because it is an open-source project, meaning anyone can read, copy, and build on its code, and it also provides in-depth developer tutorials. Therefore, DeFi developers can easily integrate DAI into their applications and build on the infrastructure of the MakerDAO protocol while leveraging its large user base.
   Because DAI has been widely integrated into other projects, it has high liquidity. Liquidity is a fundamental requirement for user-friendly DeFi projects, but it is notoriously difficult to guide. For companies that prefer to focus on product development rather than token issuance, integrating DAI and its economy can solve this problem.
   As a stable, decentralized, liquid, and composable digital asset, DAI has extensive network effects and developer focus, making it one of the most powerful cryptocurrencies in the blockchain.
5. Challenges of MakerDAO
   Since its launch in 2017, MakerDAO has faced market conditions that sometimes led to its value not accurately pegging to the US dollar. For example, after experiencing extreme market turbulence in March 2020, the price of DAI rose to $1.10. Similarly, the popularity of liquidity mining has driven demand for DAI and other stablecoins, resulting in price increases.
   For most cryptocurrencies, an increase in asset value is always a good thing, but for stablecoins like DAI, it indicates that the protocol is not functioning properly. Subsequently, MakerDAO implemented a monetary leverage system to minimize future risks.
   Additionally, MakerDAO faces competition in the crypto lending market from projects like Compound and Aave, posing significant challenges for market expansion.