The DAO Series #1: What is MakerDAO?

MakerDAO is one of the most influential and long-running decentralized autonomous organizations (DAOs) in the cryptocurrency space. As an open-source project on the Ethereum blockchain, MakerDAO created and manages Dai, one of the first and most widely-used decentralized stablecoins.

Beyond just Dai, MakerDAO represents a pioneering model for decentralized governance and finance. Through its DAO structure and native tokens, the protocol allows for collective decision-making, risk management, and community funding of public goods.

Since its launch in late 2017, MakerDAO has evolved from an experiment in crypto-collateralized stablecoins to a core infrastructure pillar of the DeFi ecosystem. Today, there is over $4.4 billion worth of crypto assets locked into MakerDAO smart contracts.

Join us as we explore the origins, workings, and impact of this influential DeFi protocol.

The History and Timeline of MakerDAO

MakerDAO was founded in late 2014 by Rune Christensen and seeded by early collaborators like Andy Milenius. The project emerged from Christensen’s writings on the need for a decentralized, permissionless stablecoin to enable more use cases for Ethereum and blockchain technology.

After initial research and prototyping, MakerDAO was formally announced in early 2015. The project name referenced the “Maker” smart contract that would mint and manage the Dai stablecoin supply.

In 2017, MakerDAO raised $27.5 million through venture funding as well as one of the first-ever Ethereum token sales. The progenitor DAI stablecoin and MKR governance token were launched on mainnet in late 2017.

Early versions of Dai were backed by only ether collateral. But in late 2018, multi-collateral Dai launched, allowing users to lock up non-ETH crypto assets to mint Dai.

MakerDAO saw rapid growth in 2020 and 2021 as DeFi exploded in popularity. MKR tokens became a DeFi blue chip asset, and Dai demand surged. Several protocol upgrades and governance reforms were enacted to ensure system solvency.

As of 2022, Dai had reached nearly $7 billion in circulation, backed by over $5 billion worth of crypto collateral. MakerDAO remains a cornerstone of open finance.

How MakerDAO Works

MakerDAO utilizes an intricate system of collateral, debt, fees, governance tokens, and external actors to generate and stabilize the Dai stablecoin. Let’s break it down step-by-step:

  1. Users lock up collateral assets like ETH, BAT, or WBTC into Maker Vaults in exchange for newly minted Dai.
  2. The Target Price Rate system dynamically adjusts collateralization ratios and fees to incentivize the market to keep the Dai price ≈ $1.
  3. MKR token holders govern risk parameters and vote on upgrades to ensure solvency.
  4. External players can buy/sell Dai or liquidate undercollateralized vaults to recoup collateral as further stability mechanisms.
  5. All fees are used to buy back and burn MKR tokens, accruing value to holders providing good governance.

This carefully balanced ecosystem of risks, incentives, and stakeholders enables fully decentralized management of the Dai credit system. No individuals can alter the core mechanisms.

What Makes MakerDAO Unique

Unlike previous stablecoin models that rely on fiat reserves or algorithms, MakerDAO introduced several novel concepts:

  • Governance tokens (MKR) that capture the value of good stewardship over a common resource pool
  • Fully transparent on-chain collateral that can be publicly monitored
  • Direct user control over minting/redeeming stablecoins
  • Stability arising from game-theoretic mechanisms between multiple actors, not just pegging to an external asset
  • Recapitalization of last resort (Global Settlement) that avoids protocol insolvency

This combination of crypto-economic innovation allows for a stablecoin that does not rely on any trusted third parties or legal entities. MakerDAO pioneered the viability of purely decentralized finance.

The Shift to Multi-Collateral Dai

A major milestone for MakerDAO was the 2019 launch of Multi-Collateral Dai (MCD). This allowed new crypto assets like Basic Attention Token and Wrapped Bitcoin to back Dai minting alongside ether.

MCD brought several benefits:

  • Greatly increased Dai supply capacity and peg robustness
  • Introduced diverse, high-quality collateral to improve risk management
  • Provided use cases for “tokenizing” real-world assets on Ethereum
  • Prepared the system for scalability upgrades like d3m and L2 solutions

The multi-asset collateral model was a breakthrough in decentralized finance. It showed that nearly any crypto asset could plug into MakerDAO to bootstrap liquidity and unique DeFi opportunities.

Controversies and Challenges for the DAO

As one of the longest-running decentralized governance experiments, MakerDAO has faced its share of controversies and stability challenges.

In March 2020, ether prices crashed rapidly from around $200 to $90. Many Vault holders were liquidated through forced auctions. This revealed the need for better emergency procedures.

Governance debates also frequently occur on risk parameters, collateral assets, and upgrades. Conflicts between the Maker Foundation and community members have highlighted difficulties in decentralized organizations.

Despite these growing pains, the Maker community has continued to expand and innovate. The successful growth of Dai demonstrates the viability of decentralized organizations beyond early theoretical hype.

MakerDAO Tokens and Governance

MakerDAO has two tokens that are integral to its operations:

MKR: Governance Token

  • Grants voting rights in protocol changes and new collateral types
  • Paid to MakerDAO as fees in return for good governance
  • Has a floating supply, with new MKR minted or burned based on stability needs

DAI: Stablecoin

  • Soft-pegged to $1 USD through system mechanisms
  • Minted by users putting up collateral into Vaults
  • Used as a robust medium of exchange across DeFi

This dual token model aligns financial incentives and gives MakerDAO a self-sustaining source of funding for development. MKR holders are incentivized to govern the system well because it will be adopted, creating Dai demand that feeds fees back into burning MKR.

MakerDAO Future Outlook

MakerDAO remains one of the most respected and relied upon pillars of decentralized finance. But the roadmap continues evolving ambitiously.

Ongoing initiatives include:

  • Integrations with real-world assets and blockchain bridges
  • Upgrades like Dai streaming payments and availability on Layer 2 platforms
  • Decentralizing oracle feeds and expanding governance participation
  • Developing an improved reference interest rate model
  • Generalizing the system for Anyone-To-Anyone finance

As MakerDAO decentralizes further, it hopes to become a fully community-owned public good. This would make it resilient against regulatory changes and cement its role as basic financial infrastructure for the decentralized economy.


MakerDAO represents one of the most successful working models for permissionless finance and decentralized governance. Since its emergence in 2014, it has pioneered the viability of concepts like crypto-backed stablecoins, tokenized governance, decentralized collateral networks, and autonomous community organizations.

Despite setbacks and critiques, MakerDAO has shown impressive growth. Over $6 billion worth of real-world collateral now backs the Dai Credit System. Millions rely on Dai for everyday DeFi transactions. And a thriving community of contributors oversees risk management and protocol upgrades.

MakerDAO offers a window into the possibilities for economics, finance, and coordination that distributed ledger technology enables. As blockchain adoption grows, MakerDAO aims to generalize its models to become basic public infrastructure for finance in this new era.