Home / Glossary / Maker Protocol (MakerDAO)

Maker Protocol (MakerDAO)

Maker Protocol (MakerDAO) – Definition:

The Maker Protocol, developed by MakerDAO, is a decentralized credit system operating on the Ethereum blockchain. At its core, the protocol provides a solution for generating Dai, a fully-collateralized stablecoin designed to minimize price volatility. The Maker Protocol functions through a two-tiered system:

  1. Single-Collateral Dai (SCD): In this system, users lock Ethereum (ETH) as collateral within smart contracts known as Collateralized Debt Positions (CDPs). The locked ETH serves as a buffer to create Dai.
  2. Multi-Collateral Dai (MCD): Building upon the SCD model, MCD extends the range of eligible collateral beyond ETH, allowing a broader array of assets to be utilized.

Users deposit collateral into smart contracts to generate Dai, and the amount of Dai generated correlates with the value of the locked collateral. The generated Dai can be repaid at any time, along with a stability fee.

To safeguard the protocol’s stability, MakerDAO employs liquidation mechanisms. If a user’s collateral falls below a specified threshold (liquidation ratio), their assets are auctioned to restore proper valuation. This incentivizes users to maintain collateral above the required level.

MKR functions as the governance token of the Maker Protocol. MKR holders possess voting rights to influence protocol changes, including adjustments to stability fees and risk parameters. MKR tokens can also be burned to create more Dai or minted to reduce Dai in circulation, ensuring Dai’s role as a decentralized stablecoin.

Dai, the outcome of the Maker Protocol, is a decentralized stablecoin soft-pegged to the value of the U.S. dollar. It serves as a reliable, low-volatility asset within the decentralized finance (DeFi) ecosystem, facilitating various DeFi services such as peer-to-peer loans and decentralized exchanges.

MakerDAO’s innovative contribution lies in offering a fully decentralized alternative to traditional stablecoins by allowing anyone to participate in generating and using Dai without central authority control. With over 400 platforms integrating Dai, it has become one of the most liquid and integral assets in the DeFi space.

Related Terms

Zero Knowledge Proof

Zero-Knowledge Proof (ZKP): A cryptographic method allowing an entity to prove the truth of a statement without revealing any additional information.

Read More »


Year to Date (YTD) in the realm of cryptocurrency refers to a vital metric that assesses the performance of a digital asset within a specific calendar year, spanning from January 1st to the current date.

Read More »

Yield Farming

Yield Farming is an investment strategy in the realm of decentralized finance (DeFi) where cryptocurrency holders provide their assets to a DeFi protocol to earn returns, often in the form of additional tokens.

Read More »