What is Maker Token (MKR)?

Money today isn’t worth what it was yesterday, literally. At least in the world of cryptocurrency, its value fluctuates daily. Nevertheless, cryptocurrency is redefining the concept of money and what it can do. Maker Token (MKR) attempts to resolve the volatile nature of crypto with the understanding that the reasons crypto isn’t perfect are its fixed supply and speculative investment. 

What is MKR?

MKR is a cryptocurrency depicted as a smart contract platform, are deployed on the Ethereum blockchain. Its purpose is to stabilize the value of a bond known as DAI through smart contracts called Collateralized Debt Positions (CDP). When the life of the smart contract has ended, the MKR token is gone. It can be sent and received by any Ethereum account, or any smart contract that is programmed to use the MKR transfer function. It is more stable than most digital monies on the market because of how it’s valued.

Where Does MKR’s Value Come From? Introducing the DAI

MKR’s value is attributed to the DAI bond, which is pegged to the US dollar, meaning that 1 DAI = US$1. Additionally, it uses interest rates to stabilize its price. Anyone who has collateral assets can use them to purchase DAI on the Maker platform via CDPs. These CDPs hold the assets that are deposited by users and allow them to generate DAI to then be used to purchase or sell MKR.

However, purchasing DAI also incurs debt. This is a good thing, as in order to better stabilize the value, the debt locks the deposited collateral inside the CDP until it’s later paid back in DAI. Once the DAI is paid back, the user is finally allowed to withdraw their collateral and begin trading again. Circle of life.

MKR = DAI + CDP

There is a direct relationship between the generation of DAI and the amount funded into the CDP. As the need for DAI increases, so does the CDP, resulting in a larger amount of MKR. In summary, here’s how the DAI and CDP work together, according to the whitepaper.

How Does a MKR Transaction Work?

Step 1: Creating the CDP smart contract and depositing collateral

To trade with MKR, a user must first send a transaction to the Maker platform, creating the CDP smart contract. The user will then execute a second transaction to fund that smart contract (for legal folks, think of this as “consideration”) with the type and amount of collateral that will be used to generate the DAI. Once funded, the CDP is considered to be “collateralized” or backed.

Step 2: Generating DAI from the collateralized CDP smart contract

The user of the CDP contract then executes a transaction to the platform to retrieve the amount of DAI they want from the CDP, simultaneously accruing the same amount in debt. Once the user has acquired the DAI, they are then “locked out” from their collateral, preventing them from withdrawing it until the debt (withdrawn DAI) is paid back.

Step 3: How to pay down the CDP debt

As previously noted, in order for a user to obtain possession/ownership of their collateral again, they must pay down the debt in addition to interest (“stability fee”), which accrues daily. Once the debt is paid in full, the MKR is gone, removing it from the supply chain, starting the process over again each time a user wants to use MKR.

How Is MKR Regulated?

In a sense, you could say that MKR is self-regulating. The goal of the coin is to over-collateralize, creating less risk of insolvency. In the event that a CDP is undercollateralized, the Automatic Recapitalization feature is triggered, which forces the dilution of MKR by automatically creating new MKR and selling it back to the platform, bringing it back in balance from the point of insolvency. Thus, if an individual were to engage in fraud or any other bad-faith behavior, this would automatically dilute their tokens, harming them.

What Does The Future Hold For MKR?

This currency may be the first “smart” cryptocurrency due to its goal of stabilization and growth. The future of MKR looks bright and we will continue to keep a watchful eye on it. For those interested in getting started with MKR, you will need to have a digital wallet, which you can get here.