What is Maker (MKR)? Your ultimate guide
Will regulatory clampdowns on stablecoins hurt the Maker buzz?
- How does Maker work?
- What is Maker coin used for?
- Governance token
- Founder of MKR
- How does the Maker coin work?
- Final thoughts
Maker Protocol’s MKR is an unusual crypto that works in an unconventional way. Its value is not driven up or down by speculation but instead is largely dictated by the growth of the DeFi sector and stablecoins.
The Maker Protocol has been developed to manage and produce DAI coins – DAI is currently one of the most popular stablecoins around.
Thus, the more popular DAI is, the more Maker is valued. Its fans claim Maker Protocol is both exciting and increasingly important.
So what is Maker (MKR) and how does it work?
How does Maker work?
The project has a singular goal: to democratise lending and provide individuals, regardless of their financial background, with access to loans – in a nutshell, decentralised finance (DeFi).
The only thing borrowers need in order to take out a loan is cryptocurrency as collateral. This crypto is locked into the Maker DAO (decentralised autonomous organisation) and secured via smart contracts.
In exchange for this locked-up collateral, borrowers receive DAI coins. DAI, like other stablecoins, have a stable value and do not experience the volatility that most crypto coins struggle with. DAI is pegged to the dollar, meaning each DAI coin should be exactly equal to $1.
Because DAI is pegged to the US dollar you only ever need to pay back what you originally borrowed plus any additional interest. For example, if I deposit 1ETH and get back 100 DAI, to get back my money I would have to return 100 Dai plus any fees. Then I could get back my 1 ETH.
Other stablecoins, however, work in a different way. If assets that have been deposited experience a price downswing, the individual must pay back more of the currency to repay the loan.
In the Maker DAO system, therefore, borrowers always know precisely how much they need to pay back and there are no nasty surprises.
But what if the crypto in the vaults dip in value? What happens then? This, in part, is where the Maker (MKR) token comes in.
What is Maker coin used for?
MKR, unlike DAI, is highly volatile. The token is used to subsidise crypto collateral stored in vaults during price downswings.
If during these times the value of the cryptocurrency deposited is not enough to cover the corresponding DAI coins, the protocol liquidises the vault's contents.
If the amount of DAI produced in the process of liquidation is insufficient, the protocol mints new MKR tokens. The protocol then sells the token to cover the shortfall. The level of MKR supply subsequently increases.
MKR is also needed to pay off the fees accumulated on CDPs (collateralised debt positions) that have been used to generate Dai in the Maker system.
MKR is not just a utility token, however. A large function of the token is to help govern the complex system.
An important draw for the MKR coin is that holders can get involved in managing one of the most important and established stablecoins on the market.
The healthier the ecosystem, the more the value of MKR token rises. This incentivises holders to make good decisions about the future of the ecosystem.
Maker holders can vote on a range of topics, including whether new collateral asset types should be added to the protocol or whether the risk parameters of existing collateral asset types should be altered.
Founder of MKR
The Maker cryptocurrency was founded by Rune Christensen, a native of Denmark, in 2015. A graduate of Copenhagen University, Christensen studied biochemistry. He later completed a degree in international business from the Copenhagen Business School.
How does the Maker coin work?
MKR, because of its function as a recapitalisation resource, does not work in a conventional way. The issuance and burning of MKR is dictated by complex systems designed to ensure there is always enough collateral for DAI tokens.
Thus, the price and supply of MKR is always changing, depending on how many have been burnt or issued, as well as market sentiment towards the ecosystem.
MKR is an ERC-20 token. According to the company website, there were 1 million MKR coins during the launch of DAI.
Based on Coin Gecko data, there is a current circulating supply of 901,310 MKR tokens. The price of Maker (MKR) stood at $2,453.83 on 22 December 2021 and it has a market cap of more than $2bn.
The value of the Maker cryptocurrency increased almost fourfold during 2021; however, it dropped by more than a fifth in the 30 days from the end of November 2021.
Maker could be an exciting project if the world of DeFi continues to balloon unchallenged by regulators. In that case, there is no reason why the ecosystem should not continue to grow.
However, economic turmoil, increasing interest rates and fears among central banks about the systemic risks of stablecoins could have a negative impact on the prospects of the stablecoin sector.
Based on Coin Gecko data, there is a current circulating supply of 901,310 MKR tokens.
Rune Christensen founded Maker DAO in 2015.
Maker is secured on the Ethereum network, which currently uses a proof-of-work consensus mechanism – though this is changing to proof of stake in 2022 with ETH 2.0. Smart contracts secure collateral deposited by borrowers.