In the start, DAI was introduced as a single-collateral DAI (SAI), mainly backed by ETH as collateral around 2017. Later, they introduced the Multi-Collateral DAI. DAI is a stablecoin that is decentralized, unbiased, and collateral-backed, soft-pegged to the dollar. Also with the introduction of USDS now RWA can also be used as a collateral to back the stablecoin issued.
(Basically, soft-pegged means it follows the price of the dollar but can fluctuate 2% based on token circulation.)
Now, who decides which collateral is accepted for a vault or what the liquidation ratio will be? The second token holders, i.e., the MKR token holders. We will talk about this more in a bit.
Each vault has its own liquidation ratio, and if users want to withdraw any or all of their assets, they need to repay the DAI they were given, plus an additional stability fee (or interest rate). As we know, MakerDAO is one of the protocols that survived the 2021-22 bear market. One of the reasons for this is their overcollateralized vaults, with the utilization ratio set to an average of 150%
When the vault becomes undercollateralized, i.e., when the collateral value goes down, the utilization ratio will be less than the liquidation ratio. Upon seeing this, the system detects the issue and moves the vault to auction, where keepers will bid for the loan amount and the stability fees. If this level is met, there is something more special in the MakerDAO ecosystem: they re-auction the vault, but now the process is reversed—keepers have to bid for the loan amount.
DSR (Dai Savings Rate)
Holders can lock their $DAI in a DSR Contract, and can earn some interest rate. When DAI is locked it is no longer in the circulation this is very critical thing:
Maker Endgame
Maker DAO has rolled out a 5 phase Endgame plan in which the final goal is to reach $100 B in TVL which is currently around $5.67 Bn in 3 years, a very highly ambitious plan.
Under this plan two new tokens, upgraded version of DAI (the stablecoin) & MKR (the governance token) were launched:
DAI – USDS ( 1:1 )
MKR – SKY ( 1:24,000 )
Reason for upgrade?
Lots of articles have talked about why MakerDAO decided to upgrade their native stablecoin and governance token. Most of the articles say it’s because of the extra rewards and features that both can provide. Here are three reasons I think are the main reasons for the upgrade:
Centralized Governance:
Maker’s governance is highly centralized. Out of the last 50 polls, nearly all were resolved unanimously, with the entities to whom Rune (the founder) delegated his tokens voting in line with Rune’s stance.
Identified wallets show that Rune holds approximately 116,000 MKR, representing 13% of all tokens in circulation. Of these, 76,750 MKR are staked in MakerDAO’s governance contract.
This rebranding of the MKR is a step in order to make the governance more decentralised which is centralised to some players only.
USDS Upgrade:
Although USDS aims to fulfil the same use-case as DAI, it does have a few differences and more importantly it is a customisable or upgradable smart contract in order to consider any rule and regulation changes in future.
To ensure USDS can safely reach global scale, it may eventually be upgraded
to include a freeze function similar to the industry standard of other major RWA-backed stablecoins if the decentralized governance of Sky decides so
Sky Protocol’s SubDAOs
In the Sky Protocol ecosystem, a SubDAO is a decentralized autonomous organization (DAO) that operates as a semi-autonomous entity within the larger Sky ecosystem. Established for a specific purpose. Spark Protocol is a prime example of a Sky Protocol SubDAO, focusing on lending within the ecosystem.
$SPK is a DeFi protocol and sub-DAO of Sky Ecosystem, managing over $7.9B in TVL. It offers lending, savings, & liquidity for stablecoins like USDS and USDC across Ethereum, Base, & other chains.
Conclusion
The situation of MakerDAO is an interesting case to study because, since the launch of DAI in 2017, this protocol has held a crucial place in the DeFi ecosystem on Ethereum. DAI, and now USDS, are benchmarks in the decentralized stablecoin sector within our ecosystem, which can now be deployed on Solana in addition to Ethereum.
With the increased importance of Sky, the liquidity of the MKR token could help mitigate potential liquidations in the event of a significant price drop. There is a timeline for the one direction swap, after that 1% penalty fee in every 3 months for 25 years.
To improve the current situation, it would be preferable to decentralize Maker’s governance towards independent parties, incentivize the participation of other MKR holders in governance, and ultimately clarify the role of the SKY token within Maker’s governance, which currently appears to be quite complex.
