MakerDAO governs the stability of Dai token.

MakerDAO consists of holders of MKR tokens. Each holder has voting power proportional to the amount of MKR tokens he owns. That way, the main purpose of MKR is to govern MakerDAO.

Dai is a stable coin that is pegged to USD. In other words, one Dai is worth about 1 dollar. However, unlike stable coins like Tether that are issued by a central organization, Dai can be issued by anyone. This means that in reality, the price of Dai token is decided by market forces. To guarantee the stability of Dai, MakerDAO has several mechanics to keep the supply and demand at equilibrium. These mechanics are: adding new CDP types, modifying existing CDP types, modifying sensitivity parameter, modifying target rate, choosing the set of trusted oracles, modifying price feed sensitivity, and choosing the set of global settlers.

The modification of system parameters is done by accepting proposal contracts. These contracts can be submitted by any Ethereum user. After submission, MKR holders can vote on different proposals. The proposed contract that gets the most votes becomes active and all changes that are written in the contract are applied to the system.

MakerDAO introduces a financial instrument called Collateralized Debt Position (CDP). Anyone can create a CDP by locking some of his assets to the MakerDAO smart contract. After that, he can take a debt in Dai. The maximum allowed debt depends on the number of locked funds. At the moment, there is only one type of CDP, which is backed by Ethereum tokens. MakerDAO holders can add new CDP types, with different collateral and risk parameters. Thus in future, more CDPs can become accessible.

Each CDP type has a set of risk parameters that represent the stability of backed collateral. These risk parameters are the debt ceiling, liquidation ratio, stability fee, and penalty ratio. Debt ceiling defines the maximum amount of debt that can be created with the CDP. Liquidation ratio is the collateral-to-debt ratio at which CDP becomes vulnerable to liquidation. Stability fee is a fee paid for taking debt. Penalty ratio defines the penalty fee that is used to cover the inefficiency of the liquidation mechanism. In general, the more volatile the collateral, the less debt one can take with CDP backed by this collateral, the more the collateral is prone to liquidation, and the more fees he’ll have to pay. Holders of MKR can change existing CDPs by tuning these parameters based on the economic situation.

When the price of Dai on the market slides from its Target Price, the Target Rate Feedback Mechanism (TRFM) is launched. The purpose of this mechanism is to manage the supply of Dai by making it cheaper or more expensive to issue new Dai coins. This mechanism works automatically, without a control of any party. MakerDAO participants can change the sensitivity of the TRFM, defining how eager the mechanism reacts to price deviations.

The Target Rate determines the change of Target Price over time. Usually, the higher the market price is shifted from the Target Price and the higher the sensitivity of the TRFM, the higher the Target Rate. Governance can change the Target Rate. In practice modifying the Target Rate will only be done in one specific circumstance: when MKR voters want to peg the price of Dai to its current Target Price.

The operation of MakerDAO depends on price oracles. Oracles are decentralized sources of external information about the world. In Maker, oracles provide the price of the collateral (Ethereum) and Dai on the market. The information of many oracles collected and averaged, so if some of the oracles don’t work or provide false data, the system will still function. In fact, up to the half of oracles can malfunction and the system will still work correctly. MKR holders can change the set of trusted oracles.

Price feed is a result of oracles’ work, which is a set of collateral prices over time. MakerDAO can change the price feed sensitivity to control how fast the system reacts to the changes in price feed. This restriction ensures that there is enough time to trigger a global settlement in the event that an attacker gains control over a majority of the oracles.

In case of serious emergencies, such as long-term market irrationality or hacker attack, members of MakerDAO can start the global settlement. Basically, the global settlement is the process of stopping all operations with Dai and returning locked collateral to those who will pay the debt back. MakerDAO can change the set of global settlers, and decide how many votes from global settlers is enough to initiate global settlement.

Besides the use of MKR as the governance token, the token has utility use. Owners of CDR should pay fees based on the amount and duration of debt they take. This fee can be paid only in MKR. The MKR paid as fees are burned. Initially, there were 1 million of MKR and no MKR will ever be generated, so the amount of tokens is gradually decreasing by burning, making it a deflationary token.

Finally, sometimes the CDP becomes undercollateralized and the process of liquidation is initiated. In that case, locked collateral is sold on the market to cover the worth of debt. If the funds from selling the collateral are not enough to cover the debt, the MKR is diluted and sold on the market to cover the debt leftover.

Initially, the founders held 1 million MKR tokens, which were distributed between MakerDAO developers, private sale investors, and the fund. Part of the supply is circulating at the exchanges. A large part of MKR is controlled by Dai foundation, which plans to spend the funds on the platform development, funding of the decentralization development, application, and infrastructure, and making deals with strategic partners.


  • September 10, 2015: The first post in MakerDAO blog, describing the work of platform. medium.com
  • January 29, 2017: MKR tokens are started to trade at exchanges. reddit.com
  • December 16, 2017: Selling of $12M of MKR to partners, led by Andreessen Horowitz and Polychain Capital. medium.com
  • December 19, 2017: The launch of Dai network. medium.com
  • February 17, 2018: Launch of the Stable Fund, a $45 million fund for the MakerDAO Ecosystem. medium.com
Hi. I write articles like this each week. You can subscribe and get them delivered to your email address.