MakerDAO enables individuals who hold $ETH and have a MetaMask or any other compatible wallet to engage in lending and borrowing activities, using the stablecoin, $DAI.

$DAI token is a decentralized, unbiased, collateral-backed stablecoin soft-pegged to the US dollar. It serves as the medium for facilitating loans against the collateral placed by borrowers on the platform.

Users can collateralize a certain amount of $ETH (or any other supported asset) in the MakerDAO protocol to generate a specific amount of $DAI. In order to release their $ETH from the platform, users must repay the loan along with any additional fees incurred.

The Maker Protocol operates through the use of two separate digital assets, known as $DAI and $MKR. These tokens play distinct roles within the system, enabling it to function. $DAI serves as the primary service provided by the Maker Protocol, while $MKR acts as the governance token for making changes to the software that supports $DAI.

The holders of $MKR tokens play a crucial role in determining the direction and management of the Maker Protocol. They are responsible for casting votes on proposals that affect the usage of $DAI, and for implementing technical modifications to the protocol. Additionally, they approve non-technical decisions on the blockchain.

The Maker Protocol operates differently from traditional lending practices in that it uses crypto assets as collateral rather than cash. Users can borrow loans using multiple crypto pairs supported by the protocol. For instance, a user can use an $ETH/$DAI trading pair to borrow $DAI by providing $ETH as collateral. Borrowers deposit the collateral in smart contracts called Maker Vaults within the protocol.

Maker Vaults

A Maker Vault is a smart contract on the Ethereum blockchain that enables users to use their crypto assets as collateral in order to acquire the stablecoin, $DAI. This process of creating a Maker Vault is known as "opening a CDP" (Collateralized Debt Position) and is used to borrow $DAI.

The amount of $DAI that can be generated is based on the value of the collateral, and the collateralization ratio established by MakerDAO. Users can also close their vault by repaying the borrowed $DAI, together with any interest and fees, in order to retrieve their collateral. The Maker Vault is a crucial component of the MakerDAO ecosystem, providing users with access to the stablecoin, $DAI.

Users can access the Maker Protocol and create vaults through various interfaces, including Oasis Borrow and those built by the community specifically such as InstaDapp and DeFi Saver.

Fees

Generating $DAI comes with the obligation to repay the borrowed $DAI and the stability fee to withdraw the collateral locked inside the vault. The stability fee can be seen as the cost for obtaining $DAI by minting it. This fee accumulates over time and can be paid using either $MKR or $DAI.

When the stability fee is increased, it becomes more expensive to borrow $DAI. This decrease in demand for $DAI will encourage CDP holders to create less of it and / or to destroy existing $DAI to retire their debt in CDP. As a result, raising the stability fee can help bring the value of $DAI back to its target rate.

The stability fee is a yearly percentage charge on $DAI generated by vaults. It is adjusted by Maker Governance and applies to all vaults of the same type. The stability fee is mainly used to compensate the Maker Protocol for the risk it incurs due to fluctuations in the value of the collateral that backs the generated $DAI. Additionally, it acts as the primary source of income for the Maker Protocol.

The interest rates for each type of collateral are determined by the risk associated with it, and current market conditions. These rates can be adjusted by the governing body of Maker, known as Maker Governance, with suggestions from risk teams elected through governance. Once established, the rates stay the same until they are modified again by Maker Governance. It is recommended that those who own vaults, known as Vault Owners, regularly check the rates to ensure their vaults have sufficient collateral.

Users can use the Maker Protocol through the Oasis Borrow interface, which is the gateway into the Maker Protocol. The Oasis Borrow platform has different features and associated fees. Multiply action, which increases the user’s position in $DAI by borrowing more, has a fee of 0.2 % on the amount borrowed.

The earn strategy can be utilized at no cost to the user; however, they will be responsible for paying the necessary transaction fees. Users who engage in multiple positions or utilize the Maker Vault will also need to pay a continuous stability fee to the Maker Protocol. There is no cost associated with borrowing, but fees for using the Ethereum network will apply. These stability fees will go directly to the Maker Protocol, not to the Oasis.app. It's important to keep in mind when borrowing $DAI, that there is a 13 % penalty for liquidation. Currently, the stability fee rates may vary between 0.5 % and 3.5 %.

Oracles

Price Oracles

The Maker Protocol uses a decentralized Oracle infrastructure to obtain real-time information about the market price of the collateral assets in Maker Vaults, in order to trigger liquidations. $MKR voters select trusted Oracle feeds to provide price information through Ethereum transactions, and also control the number of feeds in the set. The Maker Protocol receives price inputs through the Oracle Security Module (OSM) to protect the system from an attacker attempting to gain control of a majority of the Oracles. The OSM 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

$MKR voters select Emergency Oracles to act as a security measure against any possible attacks on the governance process, or on other Oracles. These Emergency Oracles are empowered to halt specific Oracles (e.g., $ETH and $BAT Oracles) to prevent a large number of users from withdrawing their assets from the Maker Protocol in a short period of time. They also have the authority to trigger an emergency shutdown.

Permissionless

MakerDAO operates as a decentralized, community-governed organization, free from the influence of centralized entities or intermediaries. The project's governance is carried out by holders of its MKR token, with a global community of individuals leading its direction. Through various partnerships and an active developer community, MakerDAO has established a prominent position in the decentralized finance (DeFi) space. $DAI, the stablecoin generated by MakerDAO, is widely accessible and easy to use, offering financial freedom and opportunities to individuals worldwide.

MakerDAO is a unique and valuable protocol for several reasons. Firstly, it uses a decentralized Oracle infrastructure to provide real-time information on market prices, which helps to protect the system from any potential attackers. Secondly, the stability fee mechanism helps regulate the supply and demand of $DAI, ensuring its stability as a stablecoin pegged to the US dollar. This not only benefits users who need a stable currency, but also serves as a source of income for the Maker Protocol. The stability fee compensates the protocol for the risk it incurs, and provides a further layer of security to the system. These features make MakerDAO a valuable and reliable protocol in the world of decentralized finance.