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Introduction

MakerDAO is a decentralized organization dedicated to bringing stability to the cryptocurrency economy. The Maker Protocol employs a two-token system. The first being, Dai, a collateral-backed stablecoin that offers stability. The Maker Foundation and the MakerDAO community believe that a decentralized stablecoin is required to have any business or individual realize the advantages of digital money. Second, there is MKR, a governance token that is used by stakeholders to maintain the system and manage Dai. MKR token holders are the decision-makers of the Maker Protocol, supported by the larger public community and various other external parties. DAI is a crypto-backed stable coin.

With the new version of the Maker Protocol, Multi Collateral Dai (MCD), being released and live on the main Ethereum network, the Maker Protocol now accepts any Ethereum-based asset as collateral to generate Dai given that it has been approved by MKR holders and has been given specific, corresponding Risk Parameters through the Maker decentralized governance process.

The Dai Stablecoin

The Dai stablecoin is a decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar. Dai is held in cryptocurrency wallets or within platforms, and is supported on Ethereum and other popular blockchains.

Dai is easy to generate, access, and use. Users generate Dai by depositing collateral assets into Maker Vaults within the Maker Protocol (and rendering Maker Vaults). This is how Dai is entered into circulation and how users gain access to liquidity. Others obtain Dai by buying it from brokers or exchanges, or simply by receiving it as a means of payment.

Once generated, bought, or received, Dai can be used in the same manner as any other cryptocurrency: it can be sent to others, used as payments for goods and services, and even held as savings through a feature of the Maker Protocol called the Dai Savings Rate (DSR).

Every Dai in circulation is directly backed by excess collateral, meaning that the value of the collateral is higher than the value of the Dai debt, and all Dai transactions are publicly viewable on the Ethereum blockchain.

Liquidation of Risky Maker Vaults

To ensure there is always enough collateral in the Maker Protocol to cover the value of all outstanding debt (the amount of Dai outstanding valued at the Target Price), any Maker Vault deemed too risky (according to parameters established by Maker Governance) is liquidated through automated Maker Protocol auctions. The Protocol makes the determination after comparing the Liquidation Ratio to the current collateral-to-debt ratio of a Vault. Each Vault type has its own Liquidation Ratio, and each ratio is determined by MKR voters based on the risk profile of the particular collateral asset type.

Maker Protocol Auctions

The

auction mechanisms⁠

of the Maker Protocol enable the system to liquidate Vaults even when price information for the collateral is unavailable. At the point of liquidation, the Maker Protocol takes the liquidated Vault collateral and subsequently sells it using an internal market-based auction mechanism. This is a Collateral Auction.

The Dai received from the Collateral Auction is used to cover the Vault’s outstanding obligations, including payment of the Liquidation Penalty fee set by MKR voters for that specific Vault collateral type.

If enough Dai is bid in the Collateral Auction to fully cover the Vault obligations plus the Liquidation Penalty, that auction converts to a Reverse Collateral Auction in an attempt to sell as little collateral as possible. Any leftover collateral is returned to the original Vault owner.

If the Collateral Auction does not raise enough Dai to cover the Vault’s outstanding obligation, the deficit is converted into Protocol debt. Protocol debt is covered by the Dai in the Maker Buffer. If there is not enough Dai in the Buffer, the Protocol triggers a Debt Auction. During a Debt Auction, MKR is minted by the system (increasing the amount of MKR in circulation), and then sold to bidders for Dai.

Dai proceeds from the Collateral Auction go into the Maker Buffer, which serves as a buffer against an increase of MKR overall supply that could result from future uncovered Collateral Auctions and the accrual of the Dai Savings Rate.

If Dai proceeds from auctions and Stability Fee payments exceed the Maker Buffer limit (a number set by Maker Governance), they are sold through a Surplus Auction. During a Surplus Auction, bidders compete by bidding increasing amounts of MKR to receive a fixed amount of Dai. Once the Surplus Auction has ended, the Maker Protocol autonomously destroys the MKR collected, thereby reducing the total MKR supply.

Key External Actors

In addition to its smart contract infrastructure, the Maker Protocol involves groups of external actors to maintain operations: Keepers, Oracles, and Global Settlers (Emergency Oracles), and Maker community members. Keepers take advantage of the economic incentives presented by the Protocol; Oracles and Global Settlers are external actors with special permissions in the system assigned to them by MKR voters; and Maker community members are individuals and organizations that provide services.

Keepers

A Keeper is an independent (usually automated) actor that is incentivized by arbitrage opportunities to provide liquidity in various aspects of a decentralized system. In the Maker Protocol,

Keepers are market participants that help Dai maintain its Target Price⁠

($1): they sell Dai when the market price is above the Target Price, and buy Dai when the market price is below the Target Price. Keepers participate in Surplus Auctions, Debt Auctions, and Collateral Auctions when Maker Vaults are liquidated.

Price Oracles

The Maker Protocol requires real-time information about the market price of the collateral assets in Maker Vaults in order to know when to trigger Liquidations.

The Protocol derives its internal collateral prices from a

decentralized Oracle infrastructure⁠

that consists of a broad set of individual nodes called Oracle Feeds. MKR voters choose a set of trusted Feeds to deliver price information to the system through Ethereum transactions. They also control how many Feeds are in the set.

To protect the system from an attacker attempting to gain control of a majority of the Oracles, the Maker Protocol receives price inputs through the

Oracle Security Module⁠

(OSM), not from the Oracles directly. The OSM, which is a layer of defense between the Oracles and the Protocol, delays a price for one hour, allowing Emergency Oracles or a Maker Governance vote to freeze an Oracle if it is compromised. Decisions regarding Emergency Oracles and the price delay duration are made by MKR holders.

Emergency Oracles

Emergency Oracles are selected by MKR voters and act as a last line of defense against an attack on the governance process or on other Oracles. Emergency Oracles are able to freeze individual Oracles (e.g., ETH and BAT Oracles) to mitigate the risk of a large number of users trying to withdraw their assets from the Maker Protocol in a short period of time, as they have the authority to unilaterally trigger an Emergency Shutdown.

DAO Teams

DAO teams consist of individuals and service providers, who may be contracted through Maker Governance to provide specific services to MakerDAO. Members of DAO teams are independent market actors and are not employed by the Maker Foundation.

The flexibility of Maker Governance allows the Maker community to adapt the DAO team framework to suit the services needed by the ecosystem based on real-world performance and emerging challenges.

Examples of DAO team member roles are the Governance Facilitator, who supports the communication infrastructure and processes of governance, and Risk Team members, who support Maker Governance with financial risk research and draft proposals for onboarding new collateral and regulating existing collateral.

While the Maker Foundation has bootstrapped Maker Governance to date, it is anticipated that the DAO will take full control, conduct MKR votes, and fill these varied DAO team roles in the near future.

Price Stability Mechanisms

The Dai Target Price

The Dai Target Price is used to determine the value of collateral assets Dai holders receive in the case of an Emergency Shutdown. The Target Price for Dai is 1 USD, translating to a 1:1 USD soft peg.

Emergency Shutdown

Emergency Shutdown serves two main purposes. First, it is used during emergencies as a last-resort mechanism to protect the Maker Protocol against attacks on its infrastructure and directly enforce the Dai Target Price. Emergencies could include malicious governance actions, hacking, security breaches, and long-term market irrationality. Second, Shutdown is used to facilitate a Maker Protocol system upgrade. The Shutdown process can only be controlled by Maker Governance.

MKR voters are also able to instantly trigger an Emergency Shutdown by depositing MKR into the Emergency Shutdown Module (ESM), if enough MKR voters believe it is necessary. This prevents the Governance Security Module (if active) from delaying Shutdown proposals before they are executed. With Emergency Shutdown, the moment a quorum is reached, the Shutdown takes effect with no delay.

There are three phases of Emergency Shutdown:

The Maker Protocol shuts down; Vault owners withdraw assets.

When initiated, Shutdown prevents further Vault creation and manipulation of existing Vaults, and freezes the Price Feeds. The frozen feeds ensure that all users are able to withdraw the net value of assets to which they are entitled. Effectively, it allows Maker Vault owners to immediately withdraw the collateral in their Vault that is not actively backing debt.

Post-Emergency Shutdown auction processing

After Shutdown is triggered, Collateral Auctions begin and must be completed within a specific amount of time. That time period is determined by Maker Governance to be slightly longer than the duration of the longest Collateral Auction. This guarantees that no auctions are outstanding at the end of the auction processing period.

Dai holders claim their remaining collateral

At the end of the auction processing period, Dai holders use their Dai to claim collateral directly at a fixed rate that corresponds to the calculated value of their assets based on the Dai Target Price. For example, if the ETH/USD Price Ratio is 200, and a user holds 1000 Dai at the Target Price of 1 USD when Emergency Shutdown is activated, The user will be able to claim exactly 5 ETH from the Maker Protocol after the auction processing period. There is no time limit for when a final claim can be made. Dai holders will get a proportional claim to each collateral type that exists in the collateral portfolio. Note that Dai holders could be at risk of a haircut, whereby they do not receive the full value of their Dai holdings at the Target Price of 1 USD per Dai. This is due to risks related to declines in collateral value and to Vault owners having the right to retrieve their excess collateral before Dai holders may claim the remaining collateral.

Conclusion

The Maker Protocol allows users to generate Dai, a stable store of value that lives entirely on the blockchain. Dai is a decentralized stablecoin that is not issued or administered by any centralized actor or trusted intermediary or counterparty. It is unbiased and borderless

All Dai is backed by a surplus of collateral that has been individually escrowed into audited and publicly viewable Ethereum smart contracts. Anyone with an internet connection can monitor the health of the system anytime at

daistats.com⁠

Bibliography

⁠

https://makerdao.com/en/whitepaper/⁠

⁠

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