What Is the Maker Protocol (MKR)?
Maker (MKR) is a utility token of the Maker Protocol based on the ERC-20 token standard. The Maker Protocol essentially is a multi-collateral Dai system that is operated by MakerDAO, which is a decentralized Ethereum-based organization. If you're interested in the current asset performance, check out the MKR price chart above.
The Maker Protocol enables users to issue Dai (DAI) stablecoins. All they have to do is take out a loan by locking-in collateral in exchange for Dai. Dai is one of the largest stablecoins that has a soft peg to USD. Essentially, any supported collateral, such as ETH, can be locked in the Maker Protocol, and an equal amount of Dai will be created as debt. The DAI value is not directly tied to the Maker price.
The Founder of MakerDAO
Rune Christensen developed MakerDAO in 2015. Rune Christensen is a Danish entrepreneur who has a degree in biochemistry and international business. Apart from founding MakerDAO, he also co-founded Try China.
Rune Christensen is accompanied by Steven Becker, who is the COO of the MakerDAO crypto project. He has experience leading various financial projects, including Polus Capital, Cubit Capital, and others.
Since its launch, the Maker price has shown a tendency towards mild-to-high volatility. It's also typically followed the broader market trends, with its value changing accordingly.
The Purpose of MKR Tokens
The main purpose of MKR is to give its holders direct access to the DAI governance process. In order to vote on various modifications that are planned to be made to the Maker Protocol, users have to hold MKR tokens. The influence they have depends on the amount of the Maker coins they hold.
The voting process happens through two pools:
- Proposal pool
- Executive pool
The community's opinion on a proposed modification is evaluated using the proposal pool. This process is done to ensure that suggestions for amendments have been carefully considered. After the proposal is approved, it's time to turn to the executive pool. In this pool, holders of MKR tokens can cast a formal vote for or against a certain proposal. The active proposal is then selected based on whatever smart contract address obtains the most MKR tokens.
However, MKR tokens have one more purpose – recapitalization. This means that MKR tokens can be used to safeguard the DAI stablecoin ecosystem from going bankrupt in times of high volatility in the crypto market. You'll find an in-depth explanation in the next chapter.
The Supply of MKR Tokens
MKR tokens have a dynamic supply, which is influenced by how the changes in the crypto market affect DAI tokens. This happens due to the second function of MKR tokens that was mentioned above. The lack of a maximum supply cap means that MKR is an inflationary asset. Therefore, it may be more difficult to predict the long-term Maker price trends.
So, how does it work?
As a stablecoin, the DAI value is backed by collateral. Other crypto assets that users deposit into Ethereum-based vaults when creating new DAI tokens serve as the collateral backing DAI.
In times of crypto market price declines, the quantity of crypto that is kept in these vaults may not be enough to fully collateralize DAI. To solve that, the Maker Protocol takes a vault that is insufficient and starts an automatic liquidation of its funds.
Then, the Maker uses the collected revenue to pay the debts associated with that certain vault. Following that, new MKR tokens are created to compensate for any shortfalls in DAI generated during the liquidation. Essentially, this boosts the total supply and affects the MKR price.
On the other hand, when the quantity of DAI generated by the auctions is above the required threshold, the Maker protocol employs a buy-back-and-burn mechanism for MKR tokens. In essence, the Maker buys a portion of MKR tokens and burns them immediately. This way, the token supply decreases.
However, additional MKR tokens are not mineable and can only be issued for recapitalization. Nevertheless, you can always buy MKR tokens on various exchanges. Just keep in mind that the Maker price is prone to fluctuate.