In the event of a high number of liquidations, MKR tokens can be minted and sold directly to the market. If the above steps are not enough to prevent a high number of liquidations, the final step that MakerDAO can implement is a dilution of MKR tokens. This incentivises all users to maintain their collateral deposits. If the collateralization ratio falls and remains below 150%, the MakerDAO platform will automatically begin selling collateral to cover the gap. ![]() The collateralization ratio will move depending on the value of collateralised digital assets. This is because MakerDAO implements automatic liquidations. If the price of ETH happened to drop by 50%, a user would need to deposit another $75 worth of ETH (50% of $150) to avoid automatic liquidation.Īlthough a 150% collateralization ratio is required, 200% is often recommended. The collateral would remain locked in the CDP until the $100 of DAI is paid back in full, along with stability fees. For example, if an ETH token holder wanted to borrow $100 worth of DAI, they would need to deposit $150 worth of ETH. A CDP's collateralization ratio must remain above 150% throughout the duration of the loan. To create a buffer to DAI stability, all borrowers are required to over-collateralise each loan by 150%. ![]() If fewer CDPs are created, it reduces DAI supply and therefore reduces DAI's value. For example, if DAI is slightly higher than $1, stability fees can be increased to reduce CDP creation. By increasing or decreasing stability fees, the protocol can alter the attractiveness of CDPs. These fees are paid in MKR tokens and are adjusted by MKR-token holders that govern the platform. Stability fees are charged for the generation of DAI tokens from Maker's vaults. These include adjusting stability fees, over-collateralisation, automatic liquidations and MKR dilution. Instead, the platform implements various systems to maintain DAI's peg. However, unlike other stablecoins, DAI does not draw its value from USD cash reserves. MakerDAO allows any user to deposit digital assets in return for the platform's stablecoin DAI. The amount of collateral required depends on how much DAI a user needs. The amount of DAI tokens minted for a loan directly correlates to the value of digital assets deposited as collateral. The collateral must also then cover any penalties and fees. The collateral is sold automatically by the system to repay the debt. If a CDP cannot be repaid, the position gets liquidated. Once the DAI loan has been repaid, DAI tokens are burnt and collateral is released. Loaned DAI can then be used for trading, hedging or purchasing other tokens. Digital assets locked within a CDP are held in Maker's vaults.Īnyone can create a CDP and receive DAI. CDPs then automatically return digital assets as soon as the DAI loan is repaid. Using smart contract technology, CDPs automatically mint new DAI tokens once digital assets have been deposited as collateral. It is not a recommendation to trade.ĬDPs are loan agreements, or smart contracts, between users and the MakerDAO protocol. Funds deposited into MakerDAO or DeFi protocols in general can be at risk of smart contract vulnerabilities, malicious developers and hacks.ĭisclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific MakerDAO and other DeFi protocols are experimental works in progress. These loans are paid in DAI and are managed through a system called "Collateralized Debt Positions" (CDPs). ![]() MakerDAO offers token holders the ability to collateralize a range of digital asset holdings in return for stablecoin loans. While MKR is important for the development of the protocol, DAI is the token leveraged for the majority of services offered on the platform. The MakerDAO protocol is associated with two native tokens: Maker (MKR), a governance and stability token, and Dai (DAI), a stablecoin pegged to the value of the US dollar. The organization is part of the decentralised finance (DeFi) ecosystem and aims to decentralize lending and borrowing services. MakerDAO is a decentralized autonomous organization (DAO) built on the Ethereum blockchain.
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