Maker MKR and ($DAI): Review How does it bring stability to DeFi?

Before DeFi was even a thing, Maker MKR was already popular. With the rise of decentralized finance applications (DeFi), the cryptocurrency space has seen a drastic growth in a short span of time and Maker is the primary pioneer of DeFi applications. Meanwhile, the world of cryptocurrency is dynamic, and every moment sees new use cases emerging for different purposes. The high volatility of cryptocurrency has also posed different challenges for users and crypto investors, leading to the creation of stablecoins which can hopefully ‘stabilize’ the volatility.

What is Maker?

MakerDAO is a Decentralized Autonomous Organization (DAO) founded by Rune Christensen in 2014. Maker ($MKR) serves as its governance token and is powered by the Ethereum blockchain.

The Maker ecosystem utilizes smart contracts to execute transactions in the protocol. Additionally, it uses the fractional reserve banking approach to ensure that its stablecoin ($DAI) remains stable.

As an ERC-20 token, MKR is not mined. Its holders are given voting rights to the collateralization on the platform. As governments who have a stake in the protocol, they are incentivized to vote on changes that could benefit the Maker ecosystem. After all, poor governance would lead to the devaluation of MKR.

The Collateralized Debt Position (CDP) makes the provision for liquidity possible when dealing with crypto assets. The idea is to provide crypto investors and traders with a decentralized platform that is suitable for margin trading. Some unique things about the Maker platform include lower prices compared to other margin trading platforms, flexibility, and improved security.

What is the difference between $MKR and $DAI?

Maker ($MKR) was created to function as a utility token for a blockchain-based platform for P2P transfers and international payments. To avoid the volatility of the crypto market, a stablecoin called “DAI” was created and connected to Maker.

Collateralized Debt Position (CDP) and its uses

The value is based on the ability of the investor or trader to get liquidity without giving out their ETH tokens. It is important to protect the DAI from loss of value by depositing more than 140% of the DAI coins. 

MKR tokens are needed to perform the transactions with the aid of smart contracts. When the CPD gets closed, or if there is a repayment of the DAI, the stability fee gets paid as MKR. 

Furthermore, after each transaction MKR gets burned. Which invariably means that the circulating supply of MKR tokens will reduce over time. An increase in MKR’s popularity will increase the demand and number of burned MKR tokens, and result in a price increase.

Uses of MKR

The MKR network has four major use cases, including usages by the participants within the network. It is important to note that MKR and DAI are the two tokens used within the Maker ecosystem. Here are the four major uses:

Traders can utilize MKR as leverage for the ETH they own

Crypto investors and traders can use MKR if they think that the price of ETH at that moment is undervalued. While anticipating the coin’s rise, they make some ETH deposits with MKR, have a CDP, and get DAI in return. 

They can make other ETH trades with DAI. When the ETH they own is leveraged, it is kept locked-up to get more ETH and make profits from the increase in price.

A liquidity creation tool that helps avoid capital gains tax

Some crypto users may be subject to capital gains tax on their earnings from cryptocurrency trades and investments. Crypto traders that have made a fortune need to secure their profits from the high volatility of digital currencies like ETH. 

MKR provides an effective solution through ETH deposited for DAI which is pegged with the exchange rate of the US dollar. The benefit is that you avoid paying tax because your money is available in a profitable and stable cryptocurrency.

A cheap way to facilitate the repayment of costly fiat loans, with crypto loans

A crypto trader or investor can deposit their ETH in order to get loans at favorable rates. This helps them boycott the expensive loan fees and interest rates of traditional banks.

For crypto investors without CDP

Another use case of the MKR token is by crypto investors who are interested in the token. However, their interest in the token does not involve creating a CDP; rather they own the tokens to sell later.

MKR tokens are created to promote financial freedom while eliminating volatility.

Markets that can benefit from MKR

MKR comes with some flexibility that makes it perfect for some markets, and these markets include:

Financial Markets

The introduction of smart contracts to facilitate the operations of derivatives and options helps collateralized stable prices. Decentralized trading tools are provided at zero interest rates, and are facilitated by the implementation of CDPs by MKR.

Transparent Auditing Frameworks

By default, the underlying blockchain technology promotes transparency. However, MKR’s platform takes transparency further with verifiable transactions. Organizations are provided with a framework that helps improve efficiency in their auditing and accounting operations. The transparency in the system mitigates corruption.

International Trade

One irregularity with performing international transactions is the high cost, which can be attributed to the presence of intermediaries. With MKR and DAI, intermediaries are taken off the equation in exchange for seamless person to person international transactions at reduced costs.

Gambling Markets

The volatility of the crypto market does not make long-term betting with crypto an advisable venture to try. The underlying risks involved include a drop in the rate and price of crypto assets.

Where to buy MKR

As opposed to some years ago when MKR was not available on popular exchanges, it is pretty much available almost everywhere. You can buy from Changelly, ShapeShift, OKEx, Nova Exchange, HitBTC, Binance, CoinBase Pro, BiBox, MXC, etc. 

Getting signed up to start trading is easy and straightforward too.

Check out our reviews for Binance and Coinbase exchanges.

More educational guides for DeFi & Staking