Maker: The Pioneer of Decentralised Finance

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Decentralised finance (DeFi) has reshaped how we think about financial systems, and at the heart of this revolution stands Maker, one of the earliest and most influential protocols on the Ethereum blockchain. With its dual-token system—DAI, a decentralised stablecoin, and MKR, its governance token—MakerDAO has pioneered a new model of open, transparent, and community-driven finance.

Unlike traditional banking systems, Maker operates without intermediaries, relying instead on smart contracts and decentralised governance. This article explores how the Maker protocol works, the role of MKR in shaping its future, and the latest developments positioning it for long-term scalability and resilience.

Understanding MakerDAO: Governance in Action

At the core of the Maker ecosystem is MakerDAO, a decentralised autonomous organisation (DAO) that governs the entire protocol. As one of the first major DeFi projects, MakerDAO introduced a lending platform powered entirely by code—no banks, no loan officers, just blockchain-based logic.

In January 2022, the Maker Foundation, which initially developed and guided the project, officially dissolved. This symbolic move marked the full transition of control to the DAO, ensuring that all future decisions are made collectively by MKR token holders.

This shift embodies the true spirit of decentralisation: power is distributed among users rather than concentrated in a central entity. Every proposal—from risk parameters to new collateral types—is subject to community voting, making governance both transparent and inclusive.

👉 Discover how decentralised governance is shaping the future of finance

How the Maker Protocol Works: Decentralised Lending Redefined

The Maker protocol enables users to generate DAI, a stablecoin pegged 1:1 to the US dollar, by locking up cryptocurrency as collateral in smart contracts known as Maker Vaults.

These vaults act as automated loan accounts. When you deposit assets like ETH or other approved cryptocurrencies into a vault, you can draw out DAI loans—without credit checks or identity verification.

Supported Collateral Assets

While Ether (ETH) was the original collateral asset, the system now supports over 34 different cryptocurrencies, including WBTC, UNI, and LINK. New assets are regularly evaluated and added through governance proposals.

To ensure stability, the protocol requires over-collateralisation: the value of your deposited collateral must be at least 150% of the DAI you wish to borrow.

For example: To generate 100 DAI ($100), you must deposit $150 worth of ETH. This buffer protects the system during market volatility.

But why would someone lock up $150 to borrow $100?

Why Use Maker Vaults?

There are several strategic advantages:

This functionality makes Maker an essential tool for both casual crypto users and professional investors navigating volatile markets.

Maintaining DAI’s Peg: The Stability Fee Mechanism

One of the biggest challenges for any stablecoin is maintaining its peg. Maker uses an elegant economic mechanism called the Stability Fee—an interest rate charged on DAI loans—to keep DAI’s price close to $1.

When DAI Trades Below $1

If DAI drops below parity (e.g., $0.98), the DAO may vote to lower the Stability Fee. This makes repaying loans cheaper, encouraging users to:

  1. Pay back their DAI loans.
  2. Burn the DAI used for repayment.
  3. Reduce circulating supply.

With lower supply and steady demand, DAI’s price naturally rebounds toward $1.

When DAI Trades Above $1

Conversely, if DAI rises above $1 (e.g., $1.02), increasing the Stability Fee discourages new borrowing. Higher costs reduce demand for DAI creation, allowing market forces to bring the price back down.

This dynamic feedback loop—governed entirely by MKR voters—ensures that DAI remains resilient even during extreme market conditions.

👉 Learn how algorithmic mechanisms stabilise digital currencies

The Role and Value of MKR: Powering Decentralised Governance

While DAI serves as the workhorse stablecoin, MKR is the soul of the Maker ecosystem. As a governance token, each MKR represents one vote in protocol decisions.

Holders participate in critical choices such as:

But MKR also plays a crucial role in risk absorption. In times of severe under-collateralisation (e.g., during a market crash), the system can mint new MKR tokens and sell them to raise funds to cover losses. This dilution risk gives MKR intrinsic economic value tied directly to the health of the protocol.

As more users engage with Maker’s services, demand for governance participation grows—potentially increasing MKR’s value over time.

Recent Innovations: The Path Forward

MakerDAO continues to evolve with bold initiatives designed to enhance scalability, decentralisation, and sustainability.

Maker Endgame: A Vision for Scale

"Endgame" is Maker’s ambitious roadmap to scale DAI issuance to $100 billion while balancing decentralised ideals with real-world operational efficiency.

Key components include:

This strategy aims to transform MakerDAO from a single protocol into a modular, multi-chain financial platform capable of competing with traditional financial institutions.

SubDAOs: Distributing Power Fairly

Historically, governance power in MakerDAO was concentrated among large MKR holders. To address this, the project introduced SubDAOs—specialised units responsible for specific functions like risk management, development, and outreach.

Each SubDAO operates semi-independently but remains accountable to the main DAO. This structure improves agility, reduces bottlenecks, and promotes broader participation across the community.

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Frequently Asked Questions (FAQ)

Q: What is the difference between DAI and MKR?
A: DAI is a decentralised stablecoin pegged to the US dollar, used for lending and payments. MKR is a governance token that allows holders to vote on protocol changes and manage risks.

Q: How do I earn DAI using Maker Vaults?
A: Deposit approved crypto assets (like ETH) into a Maker Vault with at least 150% collateralisation, then generate DAI against that deposit.

Q: Is my collateral safe in a Maker Vault?
A: Yes, your assets are held in secure smart contracts. However, if asset prices drop significantly and your collateral ratio falls too low, part of your collateral may be liquidated.

Q: Can MKR be staked?
A: While MKR isn’t traditionally staked, upcoming features like the Lockstake Engine will allow users to lock MKR for rewards under the Endgame plan.

Q: How does DAI maintain its $1 value?
A: Through dynamic adjustments to borrowing costs (Stability Fees) and supply mechanisms like burning DAI upon loan repayment.

Q: What happens if the system becomes under-collateralised?
A: The protocol can mint new MKR tokens and sell them to recapitalise the system—a last-resort mechanism that aligns incentives among stakeholders.

👉 See how next-gen DeFi platforms are solving scalability and governance

Conclusion: A Blueprint for Decentralised Monetary Policy

MakerDAO has built more than just a lending platform—it has created a fully functioning decentralised monetary system. By combining a stablecoin (DAI), over-collateralised loans, dynamic fees, and community governance (via MKR), it offers an alternative to traditional finance that is open, transparent, and globally accessible.

With innovations like Endgame and SubDAOs, Maker is not resting on its legacy. It’s actively redefining what a decentralised financial institution can become—proving that crypto ideals can scale without sacrificing principles.