Maker Protocol Explained

This project is also burdened by the responsibility of creating and developing the Maker Protocol, to maintain the system and manage DAI, stakeholders use a governance token called MKR. MKR holders are responsible for governing the Maker Protocol, which includes adjusting Dai stablecoin policy, selecting new collateral types, and improving governance itself. MakerDAO takes the smart contract concept to the next level by allowing the entire protocol to run autonomously, making it truly trustless (meaning that it operates a decentralized form of control and contribution). MakerDAO promotes transparency by tracking the Maker network and its processes on the blockchain. The primary goal of MakerDAO is to build a decentralized operating and governance infrastructure that will allow the creation of a stable currency with global reach.

The Stablecoin DAI

DAI is built on the Ethereum network and underpinned by a system of smart contracts and decentralized price feeds, it is maintained by the Maker Protocol that is pegged to the US dollar, also known as a stable coin. Stablecoins are important in the cryptocurrency world due to the market's significant and unpredictable volatility.
For example, $100 worth of DAI is backed by at least $170 worth of Ether. Maker Protocol has several mechanisms in place to coordinate DAI supply and demand in the open market, ensuring that its price remains stable. MakerDAO aims to develop a mechanism that facilitates access to decentralized finance (DeFi) through the use of cryptocurrencies. A mechanism that encourages people to convert their Ether (and other currencies currently in use) to DAI. As a result, they will be able to use a stable currency that is widely accepted in other protocols. As a result of its decentralized and transparent currency, MakerDAO improves the efficiency and transparency of financial markets.

Minimum Debt

The amount of DAI required to open and maintain the Maker Vault is known as the Minimum Debt Requirement. This is a requirement, which means that any action that would result in the vault owing less than 5000 DAI is not executable. Maker Protocol relies on prompt liquidations to prevent the accrual of bad debt. The protocol created the debt floor with the aim of preventing users from creating multiple vaults with very low debt amounts and collateral. The Debt Floor parameter determines the minimum amount of DAI that can be minted using a specific vault type for an individual vault. If a user attempts to mint DAI and the amount of DAI minted does not exceed the vault's Debt Floor, the transaction will fail and no DAI will be minted. Similarly, if a user attempts to pay back a debt that is less than the Debt Floor but greater than zero, the transaction will fail and no DAI will be paid back. Vaults The Maker Vault is a key component of the Maker Protocol that allows Dai to be generated against locked-up collateral. Vault allows users to deposit cryptocurrency as collateral and mint Dai against it. The Maker Vaults will use these cryptocurrencies to create a collateralized debt position (CDP), resulting in the corresponding DAI. You can also save it as savings by using the DAI Interest Rate Maker protocol (DIR). It is important to note that the interaction with the Maker Vault is done without an intermediary. The user interacts with it directly. There are rules of operation guiding the operation of the Maker Vaults. If you send tokens as collateral to a Maker Vault to generate DAI, the collateral will always be available under certain conditions. If the token price fluctuates beyond the “Settlement Ratio,” the system liquates the position. Liquidating the position means that the Maker Vault will sell your cryptocurrencies to keep the DAI relationship as positive and stable as possible. Vaults come with their risks as Stability Fees (SF) must be paid when producing Dai which is usually determined by MKR token voters. To reclaim collateral, users must repay the previously generated Dai as well as the accumulated SF. In essence, you want to protect the protocol and those who support it. This is accomplished through an automatic auction conducted by the Maker protocol under conditions that are clearly described in user interactions with the Maker Vaults.

Liquidation Penalty

Liquidation ensures that Dai is always backed by an adequate amount of collateral by closing out Vaults that fall below the minimum required Collateralization Ratio for their given collateral type. Liquidation Penalty is the fee that vault owners must pay when their vaults are liquidated. When a Liquidation occurs, the fee is added to the Vault's total outstanding generated DAI, resulting in more collateral being sold on Auction. The penalty is required to prevent Auction Grinding Attacks, which effectively break the Auction mechanism by preventing an attacker from exploiting Maker Protocol to make profits. The proceeds from Liquidation Penalties are used to fund Surplus Auctions, which result in burned MKR. Vault Auctions The Maker Protocol's auction mechanisms allow the system to liquidate Vaults even when collateral price information is unavailable. The Maker Protocol takes the liquidated Vault collateral and sells it using an internal market-based auction mechanism at the point of liquidation. This is an Auction for Collateral. Dai received from the Collateral Auction is used to pay off the Vault's outstanding obligations, including the Liquidation Penalty fee set by MKR voters for that specific Vault collateral type. The Dai proceeds from the Collateral Auction are deposited into the Maker Buffer, which serves as a buffer against an increase in MKR overall supply caused by future uncovered Collateral Auctions and the accrual of the Dai Savings Rate If the Dai proceeds from auctions and Stability Fee payments exceed the Maker Buffer limit (determined by Maker Governance), they are sold in a Surplus Auction. Bidders compete in a Surplus Auction by bidding increasing amounts of MKR to receive a fixed amount of Dai. After the Surplus Auction, the Maker Protocol automatically destroys the MKR collected, reducing the total MKR supply. Collateral types on Instadapp Anyone can open a Vault to generate Dai by depositing accepted collateral (currently ETH, BAT, wBTC, USDC-A, USDC-B, or TUSD) and ensuring that the collateral value to total Dai generated is at least the required minimum. If that ratio is ever breached, the Vault will be liquidated. Here is a demo of ETH-USDC-GUNI and stETH/ETH all available on your Instadapp dashboard. There are a cool bunch of collateral types available to you also. ETH-USDC-GUNI Since its launch, G-UNI has gained traction, with Instadapp using it for their liquidity mining program, which has generated $15 million in TVL, as well as ongoing consideration of the G-UNI DAI/USDC pair to be used as collateral on Maker.
stETH/ETH Staked ETH or stETH. stETH is a tokenized deposit of ETH with Lido, this token represents the underlying deposit and its earned staking interest