MakerDAO Multi-Collateral Dai (MCD) System White Paper: Features and Governance

Editor's Note: This article comes fromEthereum enthusiasts (ID: ethfans)Ethereum enthusiasts (ID: ethfans)

Summary

, author: Maker team, translation & proofreading: Min Min, A Jian & Pan Chao, reproduced by Odaily with authorization.

first level title

Summary

The Maker Protocol, also known as the Multi-Collateral Dai (MCD) system, allows users to generate Dai using assets approved by "Maker Governance" as collateral. Maker governance is a set of processes organized and operated by the community to manage all aspects of the Maker protocol. Dai is an asset-backed cryptocurrency softly anchored to the US dollar, and its issuance is decentralized and non-discriminatory. Due to its low volatility, Dai is resistant to hyperinflation and provides economic freedom and opportunity to any individual on a global scale.

This white paper explains the Maker protocol built on the Ethereum blockchain from an easy-to-understand perspective. Tech-savvy readers can directly read "Introduction to the Maker Protocol" in the Maker Documentation Portal to gain an in-depth understanding of the entire system.

About MakerDAO

MakerDAO is an open-source decentralized autonomous organization created in 2014 on the Ethereum blockchain1. The project issues a governance token called MKR, and everyone who holds the token around the world can participate in project governance. Through the scientific governance system consisting of Executive Voting and Governance Polling, MKR holders can manage the financial risks of the Maker agreement and Dai, thereby ensuring the stability, transparency and efficiency of the agreement. MKR voting weight is proportional to the number of MKR that voters have in the voting contract DSChief. In other words, the more MKR tokens a voter locks in the DSChief contract, the more decision-making power they have.

About the Maker Protocol

The Maker Protocol is one of the largest decentralized applications (dApps) on the Ethereum blockchain and the first decentralized finance (DeFi) application to achieve mass adoption.

introduction

About the Maker Foundation

The Maker Foundation is part of the global Maker community, creating the Maker Protocol with many external partners. The Maker Foundation works with the MakerDAO community to guide the decentralized governance of the MakerDAO project and drive it toward full decentralization. About the Dai Foundation The Dai Foundation is an autonomous organization based in Denmark, independent of the Maker Foundation. The Dai Foundation is responsible for managing the important intangible assets of the Maker community, such as trademarks and code copyrights, operating under strict regulations that define its authority. As stated in the Dai Foundation's proxy statement, the purpose of the foundation is to protect those parts of the Maker protocol that cannot be decentralized through technology.

introduction

Beginning in 2015, MakerDAO and developers from around the world started the first iteration of the code, architecture and documentation. In December 2017, MakerDAO released the first official white paper, introducing the original Dai (now Sai) stablecoin system.

This white paper introduces a system for staking Ether (ETH) to generate Dai through a unique smart contract called a Collateralized Debt Position (CDP). Since Ether is the only collateral asset accepted by the system, the generated Dai is called Single-Collateral Dai (Single-Collateral DAI, SCD), now also known as Sai. The white paper also mentions plans to upgrade the system to support multiple collateral assets, including ether. The plan was implemented in November 2019.

The Dai stablecoin system, now known as the Maker protocol, currently accepts all Ethereum-based assets approved by MKR holders as collateral, and MKR holders also have the right to vote to determine the risk parameters of each collateral (Risk Parameter) . The voting mechanism is a key part of Maker's decentralized governance process.

Welcome to Multi-Collateral Dai (MCD)

Blockchain technology presents an unprecedented opportunity to address public dissatisfaction and distrust of a dysfunctional centralized financial system. By distributing data across a network of computers, the technology allows transparency for every member of any group, independent of control from a central entity, resulting in a permissionless system that is impartial, transparent, and efficient—can Improving the current global financial and monetary structures to better serve the public interest.

Bitcoin was created for this. While Bitcoin is a successful cryptocurrency in many ways, it is not an ideal medium of exchange because its supply is fixed and its speculative nature creates price fluctuations that make It cannot further develop into a mainstream currency.

On the other hand, the weakness of Bitcoin happens to be the advantage of the Dai stablecoin, precisely because its design goal is to minimize price volatility. Dai is a decentralized and neutral asset-backed cryptocurrency with a soft peg to the U.S. dollar. Stability is what Dai means.

Since the single-guaranteed Dai was launched in 2017, user acceptance has continued to increase and it has become the cornerstone of decentralized financial dApps. The success of Dai is also part of a movement across the industry of stablecoins, cryptocurrencies designed to maintain price and currency functionality.

For example, in February 2019, JPMorgan became the first bank in the United States to create and test a digital currency pegged to the US dollar3. As the digital currency industry grows, some banks, financial services companies, and even governments want to create stable digital currencies (e.g., central bank digital currencies), as do large companies in the non-financial sector. For example, Facebook announced plans for Libra (a stable digital currency backed by an equivalent amount of real assets) in June 20194. However, such proposals go against the core value proposition of blockchain technology: to build a public infrastructure that is not influenced by centralized authorities or managers, and to be adopted on a global scale.

An overview of the Maker protocol and its characteristics

Maker protocol

The Maker Protocol is one of the largest decentralized applications on the Ethereum blockchain. The people involved in designing the protocol are diverse, including Maker Foundation developers, external partners, and other individuals and entities. The Maker Protocol is the first decentralized finance (DeFi) application to achieve mass adoption.

The Maker Protocol is governed by holders of the governance token MKR around the world. Through the scientific governance system consisting of Executive Voting and Governance Polling, MKR holders can manage the financial risks of the Maker agreement and Dai, thereby ensuring the stability, transparency and efficiency of the agreement. Each MKR token locked in the voting contract is equivalent to one vote.

Stablecoin Dai

The stablecoin Dai is an asset-backed cryptocurrency softly anchored to the US dollar, and its issuance is decentralized and unbiased. Dai is issued on the Ethereum blockchain and a few other popular blockchains; holding Dai requires a cryptocurrency wallet or crypto asset platform.

Dai has low barriers to generation, access, and use. Users generate Dai by using the Maker protocol to create a smart contract called a "Maker Vault" and deposit assets. This process is not only the process of Dai entering the circulation field, but also the process of users obtaining liquidity. In addition, users can also buy Dai from intermediaries or exchanges; or more simply, as long as they are willing to accept Dai as payment, they can get Dai.

Whether you generate, buy, or receive Dai, it works just like any other cryptocurrency: you can send Dai to other people, use it to buy goods and services, and even use it through something called "Dai." Deposit Rate (Dai Savings Rate, DSR)" Maker agreement function, transfer Dai to savings account.

• Generally speaking, currency has four major functions:

• medium of exchange

• unit of account

• store of value

medium of exchange

unit of account

deferred payment standard

In order to meet the above functions, Dai has specially designed the following features and application scenarios.

Dai is a Store of Value

A store of value is an asset that retains its value and does not depreciate significantly over time. Dai is a stablecoin designed to maintain price stability even in highly volatile markets.

Dai is a medium of exchange

A medium of exchange is anything that represents a standard of value and is used to facilitate the sale, purchase, or exchange (transaction) of goods or services. In different types of transactions around the world, the Dai stablecoin can be used to complete transactions.

Dai is a unit of account

A unit of account is a standardized measure of value (eg, dollar, euro, yen) used for pricing goods and services. Currently, the target price of Dai is 1 USD (1 Dai = 1 USD). While Dai has not yet become a standard measure of value outside the blockchain, it serves as a unit of account in the Maker Protocol and some blockchain dApps. Among them, the bookkeeping of the Maker protocol and the pricing of dApp services all use Dai instead of legal currency such as the US dollar.

Dai is a deferred payment standard

collateral assets

Dai's creation, value endorsement, and price stability are all achieved through the collateral assets deposited in the Maker vault. Collateral assets refer to digital assets that are voted into the protocol by MKR holders.

Any Ethereum-based asset can be used on the Maker Protocol as collateral to generate Dai, as long as it is approved by MKR holders. When permitting an asset to be used as collateral, MKR holders must also choose specific risk parameters accordingly (for example, stable assets may choose looser risk parameters, and risky assets may choose stricter risk parameters.) See below for details on risk parameters. MKR holders make these and other decisions through the Maker decentralized governance process.

secondary title

Maker Vault

• All approved collateral assets can be deposited into the Maker Vault smart contract generated using the Maker Protocol to generate Dai. Users can access the Maker Protocol and create treasuries through a variety of user interfaces (i.e. web access portals). These user interfaces include Oasis Borrow and various interfaces built by the community. Creating a vault is uncomplicated, but generating Dai means the user has a debt to the system; the Dai needs to be returned and a stability fee paid to get back the collateral locked in the vault.

Vaults are inherently non-custodial: users interact directly with the Vault and the Maker Protocol. As long as the price of the collateral is not lower than the minimum necessary level (the Liquidation Ratio, see below), the user has complete and independent control over the collateral.

• How to Interact with Maker Vaults

Step 1: Create a vault and lock in collateral

• Users create a vault through the Oasis Borrow portal or community-created interfaces such as Instadapp, Zerion, MyEtherWallet, and lock in specific types and amounts of collateral to generate Dai. The vault is considered secured when funds are deposited.

Step 2: Generate Dai through secured treasury

• After locking the collateral assets into a vault, the vault owner can use any non-custodial cryptocurrency wallet to initiate and confirm transactions to generate a certain amount of Dai.

Step 3: Pay down debt and pay stability fees

To get back some or all of the collateral, the vault owner must partially or fully repay the Dai generated by the TA and pay a stability fee that accumulates while the Dai is outstanding. The stability fee can only be paid in Dai.

Step 4: Take out collateral

After repaying the Dai and paying the stability fee, the vault owner can return some or all of the collateral back to his wallet. After the Dai is fully repaid and all collateral is taken out, the vault is left empty, waiting for its owner to lock up assets again.

It is especially critical that different collateral assets need to be separated into different vaults. As a result, some users will have multiple vaults with varying collateral types and collateral rates.

Liquidation of High Risk Maker Vaults

In order to ensure that there is always sufficient collateral in the Maker protocol to back the outstanding debt (the outstanding debt is the total value of the outstanding Dai calculated at the Target Price), any (according to the parameters stipulated by Maker governance) is judged High-risk Maker vaults are liquidated through an automated Maker Protocol auction process. The Maker protocol is determined by comparing the liquidation rate to the vault's current collateral-to-debt ratio. Each vault type has its own liquidation rate, which is voted on by MKR holders based on the risk profile of the different collateral assets.

Maker Protocol Auction

Through the auction mechanism of the Maker agreement, the system can still liquidate the vault when the price information of the collateral cannot be obtained. When a liquidation occurs, the Maker protocol takes the collateral in the liquidated vault and sells it using a market-based auction mechanism within the protocol. This is called a Collateral Auction.

The Dai obtained through the collateral auction will be used to repay the debt in the vault, including liquidation penalties (Liquidation Penalty). MKR voters set different liquidation penalties for different collateral types.

If the Dai obtained in the collateral auction is enough to pay off the debt in the vault and pay the liquidation penalty, the auction will be converted into a reverse collateral auction (Reverse Collateral Auction) to reduce the amount of collateral sold as much as possible. The remaining collateral will be returned to the original owner.

If the Dai obtained from the collateral auction is not enough to pay off the debt in the vault, the loss will become a liability of the Maker agreement, which will be repaid by the Dai in the Maker buffer (Maker Buffer). If there is not enough Dai in the buffer, the Maker protocol will trigger a debt auction (Debt Auction) mechanism. During debt auctions, new MKR is minted (increasing the amount of MKR in circulation) and sold to those users who use Dai to participate in the auction.

The Dai obtained from the collateral auction will enter the Maker buffer. The Maker buffer can act as a buffer to avoid excessive MKR issuance in the future due to insufficient collateral auctions and rising Dai deposit interest rates (see below for details).

If the Dai obtained from the auction and the stability fee exceeds the upper limit of the Maker buffer (the value set by Maker governance), the excess will be sold through a surplus auction (Surplus Auction). During the Surplus Auction, bidders use MKR to bid for a fixed amount of Dai, and the highest bidder wins. Once the surplus auction is over, the Maker Protocol will automatically destroy the MKR obtained from the auction, thereby reducing the total supply of MKR.

Example of collateral auction process:

Due to the impact of market conditions, the pledge rate of a large vault fell below the minimum threshold. An auction keeper (Auction Keeper) detected this phenomenon and initiated liquidation procedures for the vault. Suppose 50 ETH enters the auction process.

Each liquidator can have its own bidding strategy (bidding model). Bidding prices for collateral (ETH in this case) are included in the bidding strategy. The liquidator who initiates the liquidation uses the token price in his bidding strategy as the starting price for the first stage of the collateral auction. At this stage, policyholders use Dai to bid for a fixed amount of collateral, and the highest bidder wins. This quantity is indivisible, and the price paid by the bidder is the total price.

In order to buy collateral at the price specified in their bidding strategy, liquidators also submit bids in the second phase of the collateral auction. The goal of this phase is to return as much collateral as possible to the owner of the vault in a competitive market. At this stage, liquidators use a fixed amount of Dai to bid for as little ETH as possible. For example, in this example, the liquidator's bidding strategy seeks a bid price of 125 Dai/ETH, ie 5000 Dai to bid for 40 ETH. The Dai obtained in this bidding will be transferred from the vault engine to the collateral auction contract. After the bidding period ends and the bidding deadline, the auction manager wins the bid and obtains collateral. The collateral auction is completely over.

Caretaker (Keeper)

Caretakers are independent (often automated) actors that provide liquidity to various aspects of a decentralized system, incentivized by arbitrage opportunities. In the Maker Protocol, caretakers are market participants who help maintain Dai's target price ($1): they sell Dai when the market price exceeds the target price, and sell Dai when the market price falls below the target price. buy. Also called Caretakers (Liquidators) who participate in Surplus Auctions, Debt Auctions, and Collateral Auctions when Maker Vaults are liquidated.

secondary title

Price information input machine (Price Oracle)

The Maker protocol needs real-time knowledge of the market price of the assets used as collateral in the Maker vault to know when to trigger the liquidation mechanism.

DAO team

Emergency information feeders are voted on by MKR holders and are the last line of defense protecting governance processes and other information feeders from attacks. The emergency oracle can freeze a single price feeder (for example, the price feeder of ETH and BAT), and has the right to unilaterally trigger the emergency shutdown mechanism (Emergency Shutdown). In this way, the risk of a large number of customers trying to retrieve assets from the Maker agreement in a short period of time is reduced.

secondary title

DAO team

The DAO team is composed of individuals and service providers who sign contracts through the Maker governance process (Maker Governance) to provide specific services to MakerDAO. Members of the DAO team are independent market participants and are not employed by the Maker Foundation.

The flexibility of Maker governance enables the Maker community to adjust the DAO team framework to provide the services required by the entire ecosystem based on real-world situations and emerging challenges.

Members of the DAO team are divided into different roles. For example, the Governance Facilitator, who chairs the communication and governance process; and the Risk Team members, who support Maker governance through financial risk research and drafting proposals for introducing new types of collateral and managing existing ones.

While Maker governance has so far been steered by the Maker Foundation, the DAO is expected to take full autonomy in the near future, launching MKR votes to fill the various roles within the DAO team.

• Dai Savings Rate (DSR)

• The Dai deposit rate allows all Dai users to automatically receive savings income, as long as users lock their Dai into the DSR contract of the Maker protocol, which can be accessed through Oasis' deposit platform or other platforms connected to the Maker protocol. The DSR contract does not set a minimum deposit requirement for users, and users can withdraw part or all of Dai from the DSR contract at any time.

DSR is a system-global parameter that determines the benefits that Dai holders can earn based on their deposits. When the market price of Dai deviates from the target price due to market changes, MKR holders can vote to change the DSR to maintain price stability:

If the market price of Dai exceeds $1, MKR holders can choose to gradually reduce the DSR to reduce the demand, thereby reducing the market price of Dai to the target price of $1.

If the market price of Dai is lower than $1, MKR holders can choose to gradually increase DSR to stimulate demand and increase the market price of Dai to the target price of $1.

Initially, there will be a weekly DSR adjustment process. MKR holders first evaluate and discuss public market data and specific data provided by market participants before voting on the need to adjust the DSR. The long-term plan is to implement the DSR Adjustment Module, an Instant Access Module with direct control over the DSR and Base Rate. Through this module, a single MKR holder can easily adjust the DSR on behalf of a group of MKR holders (the amplitude range and frequency range of the adjustment are preset by the MKR holder). The plan is to increase the DSR's sensitivity to rapidly changing market conditions and avoid excessive use of two standard governance processes, executive voting and governance voting.

Governance of the Maker Protocol

Use of the MKR Token in Maker Governance

The MKR token — the governance token of the Maker protocol — allows its holders to vote on changes to the Maker protocol. Note that anyone, not just MKR holders, can submit a proposal to initiate a MKR vote.

Changes to Maker Protocol governance variables are unlikely to take effect immediately after being approved by vote. If voters choose to enable the Governance Security Module (GSM), activation of these changes is delayed (up to 24 hours). This period of time gives MKR holders an opportunity to act and, if necessary, trigger shutdowns against malicious governance proposals (e.g., proposals to modify collateral parameters to be contrary to current monetary policy, or to shut down proposals for safety mechanisms).

Proposal Voting and Executive Voting

The Maker governance process includes proposal voting and executive voting. The purpose of the proposal vote is to form a general consensus in the community before proceeding with the implementation vote. This helps ensure that governance decisions are carefully considered and reached consensus before entering the voting process. The purpose of executive voting is to approve/reject changes to the system state, for example, voting on risk parameters for newly introduced collateral.

Technically, each type of voting is governed by a smart contract. Proposal Contracts are smart contracts that programmatically write one or more effective governance actions. The proposed contract can only be executed once. Once executed, it immediately makes changes to the internal governance variables of the Maker Protocol. After execution, the proposed contract cannot be used again.

Any Ethereum address can deploy a valid proposal contract. MKR token holders can elect Active Proposals by voting for approval. The proposal from the Ethereum address with the most upvotes will be selected as the valid proposal. Valid proposals gain management access to the internal governance variables of the Maker protocol, and then modify those parameters.

The role of MKR tokens in recapitalization

• In addition to its role in Maker governance, MKR tokens also have an auxiliary role as a recapitalization resource for the Maker protocol. If system debt exceeds surplus, a debt auction (see above) is triggered to increase the supply of MKR tokens and recapitalize the system. This risk will incentivize MKR holders to work together to manage the Maker ecosystem responsibly and avoid excessive risk.

• Responsibilities of MKR Holders

• MKR holders can vote on the following:

• Introduce a new collateral type and set a set of risk parameters for it

• Modify, or even increase, the risk parameters of one or more existing collateral asset types

• Select the price feeder node group

• Upgrading the system

Elect the group of emergency message inputters

trigger emergency shutdown

Upgrading the system

MKR holders can use the funds in the Maker buffer to pay for various infrastructure needs and services, including information input mechanisms and collateral risk management research. Funds in Maker's buffer come from stability fees, liquidation fees, and other sources of income.

The design goal of the Maker Protocol governance mechanism is to be as flexible and upgradable as possible. If the Maker system matures under the guidance of the community, then theoretically, the form of the proposal contract will become more advanced. For example, a proposal contract can bind multiple proposals. For example, a proposed contract could contain both an adjustment to the Stability Fee and an adjustment to the DSR. However, these improvements are still up to MKR holders to collectively decide.

• Risk parameters controlled by Maker governance

• Each Maker Vault (eg, ETH Vault and BAT Vault) has its own unique set of risk parameters that are enforced. These parameters are determined based on the risk profile of the collateral and are directly voted by MKR holders.

• The following are the main risk parameters for Maker vaults:

• Debt Ceiling: The debt ceiling refers to the upper limit of the total amount of debt that can be generated by a collateral. Maker governance sets a debt ceiling for each type of collateral to ensure sufficient diversity in the Maker protocol's collateral portfolio. Once a collateral reaches the debt ceiling, it is impossible to incur more debt unless existing users repay some or all of the vault's debt (thus freeing up debt space).

• Stability Fee: The stability fee is the annual interest calculated based on the amount of Dai generated by a treasury (for users who generate Dai, the stability fee rate is equivalent to the annualized interest rate of the loan; for the Maker protocol, the stability fee The rate is equivalent to the annualized rate of return). The stability fee can only be paid by Dai, sent to the Maker buffer.

• Liquidation Ratio: A lower liquidation ratio means that Maker governance has lower expectations for collateral price volatility; a higher liquidation ratio means higher expectations for price volatility.

• Liquidation Penalty: A liquidation penalty is an additional fee charged to users based on the total amount of outstanding Dai in the vault when a liquidation occurs. The liquidation penalty is designed to encourage vault owners to keep their collateralization ratio at an appropriate level.

Collateral Auction Duration: Collateral Auction Duration is specific to each Maker Vault. The debt auction period and surplus auction period are system global parameters.

Auction Bid Duration: The minimum duration before and after the end of a single auction.

Auction Step Size: This risk parameter is designed to incentivize early bidders in the auction and prevent the proliferation of cases where the step size is too low.

Governance Risks and Mitigations

In order to maintain the successful operation of the Maker Protocol, Maker governance needs to take necessary risk mitigation measures. Some of the risks and corresponding mitigations are detailed below.

Malicious actors launch malicious attacks on smart contract infrastructure

One of the biggest risks to the Maker Protocol is malicious actors. For example, a programmer discovers a vulnerability in a smart contract that has been deployed, and then uses this vulnerability to attack the protocol or steal assets in the system.

Mitigation measures: The first priority of the Maker Foundation is to maintain the security of the Maker protocol, and the strongest line of defense of the Maker protocol is formal verification (Formal Verification). The Dai codebase is the first formally verified decentralized application codebase.

black swan event

In addition to formal system verification, signing security audit contracts with the top security organizations in the blockchain industry, organizing third-party (independent) audits, and bug bounty programs are the security roadmap of the Maker Foundation. You can visit Maker's multi-guaranteed Dai security report Github repository to view the formal verification report and the audit report of the Maker protocol.

• These security measures form a strong defense system; however, the system is by no means seamless. Even with formal verification, there may be problems with the mathematical modeling of the expected behavior, or the possibility that the assumptions about the expected behavior may themselves be wrong

• black swan event

• A black swan event refers to a rare and severe sudden attack on a system. The Maker protocol may suffer from the following black swan events:

• Collateral used to generate Dai under attack

An unexpected plunge in the price of one or more collaterals

Highly collusive price feeder attack

• Malicious Maker Governance Proposals

Note that the above "black swan events" are not exhaustive, and their ranking does not reflect the degree of possibility.

Mitigations: While no single solution is perfect, a carefully designed Maker protocol (liquidation ratio, debt ceiling, governance security module, oracle security module, emergency shutdown, etc.) response, thoughtful risk parameters, etc.) can help prevent and mitigate the severe impact of an attack.

• Unforeseen mispricing and market irrationality

The price feed problem of the information input mechanism and irrational market dynamics can cause the price of Dai to fluctuate over an extended period of time. If users lose confidence in the system, even extreme levels of interest rate adjustments and MKR additional issuance cannot bring sufficient liquidity and stability to the market.

Mitigation measures: Maker governance gathers a large enough pool of funds to incentivize caregivers, so as to maximize rationality and market efficiency, allowing the supply of Dai to increase steadily without market shocks. Emergency shutdown is the last line of defense. Once the emergency shutdown is activated, Dai holders can redeem the collateral at the target price.

• Users Moved to Easier Solutions

The Maker Protocol is a complex decentralized system. Due to the complexity of the Maker system, inexperienced cryptocurrency users may abandon the system in favor of a system that is easier to use and understand.

Mitigation: While Dai is easy to generate and use for most cryptocurrency enthusiasts and caretakers for margin trading, new users may find the Maker protocol difficult to understand and use. Although from a design perspective, users do not need to understand the underlying mechanism of the Maker protocol to monetize Dai, the Maker community and the Maker Foundation have been providing documentation and various resources as simple as possible to guide new users.

• Maker Foundation disbands

The current goal of the Maker Foundation is to maintain the Maker protocol and promote its application on a global scale with independent participants, while facilitating the governance process. However, according to the Maker Foundation's plan, once MakerDAO can fully realize self-governance, the Maker Foundation will be disbanded. If MakerDAO fails to take the lead after the dissolution of the Maker Foundation, the future health of the Maker Protocol will be threatened.

Mitigation measures: After the Maker project achieves "progressive decentralization", the dissolution of the foundation will not affect the interests of MKR holders. In addition, successful management of the Maker system will result in sufficient governance funds for ongoing maintenance and improvement of the Maker protocol.

General questions about experimental techniques

Users of the Maker Protocol (including but not limited to Dai and MKR holders) understand and accept that the software, technology, and even theory employed by the Maker Protocol are unproven, and there is no guarantee that the technology will not be interrupted or error-free. There is an inherent risk that a technical weakness, flaw, or vulnerability could lead to a complete breakdown of the Maker Protocol and/or its constituent parts.

Price Stability Mechanism

emergency shutdown

Dai Target Price

The Dai target price is used to determine the value of the collateral Dai holders will receive in the event of an emergency shutdown. Dai is soft-pegged to USD 1:1, so its target price is USD 1.

emergency shutdown

• An emergency shutdown (also referred to simply as a shutdown) has two main purposes. First, it is the last line of defense in the event of an emergency, protecting the Maker protocol from infrastructure attacks and directly enforcing the Dai target price. Emergencies include malicious governance practices, illegal intrusions, security breaches, and chronic market irrationality. Second, shutdowns are used to facilitate upgrades to the Maker Protocol system. The shutdown process can only be controlled by Maker governance.

MKR voters can also trigger an emergency shutdown immediately by depositing MKR in the Emergency Shutdown Module (ESM), as long as enough voters deem it necessary. This prevents the (active) governance security module from delaying the execution of the shutdown proposal. In the emergency shutdown module, as long as a certain number of votes is reached, the shutdown will take effect immediately.

• Three stages of emergency shutdown:

Maker protocol shuts down; vault owners get their assets back

• Once the shutdown is activated, users will no longer be able to create new vaults or manipulate existing ones, and the price feed will freeze. The frozen price feed mechanism can ensure that all users can get back their due NAV. Owners of Maker vaults can instantly withdraw more collateral in the vault than needed to secure the debt.

Auction Process After Emergency Shutdown

Dai holders redeem remaining collateral

potential market

After the auction process is over, Dai holders redeem collateral directly with Dai at a fixed exchange rate, that is, based on the target price of Dai. For example, suppose the ETH/USD exchange rate is 200:1. When the emergency shutdown was initiated, a user held 1,000 Dai. Based on the target price of $1, the user can redeem 5 ETH after the auction process ends. Redemption is unlimited. Dai holders will redeem a percentage of each collateral in the collateral portfolio. It should be noted that Dai holders may suffer losses and not be able to redeem all of their Dai holdings at the target price of $1. Partly because of the risk of collateral depreciation, and partly because vault holders have the right to retrieve excess collateral before Dai holders redeem the remaining collateral. Details on the emergency shutdown, including pre-emption rights, can be found in the published community documentation.

The Future of the Maker Protocol: Mass Adoption and Full Decentralization

• potential market

• Price-stable cryptocurrencies are an important medium of exchange for many decentralized applications. The potential market for Dai is no less than the entire decentralized blockchain industry. However, Dai's goal is far from inferior, and it will also expand to other industries.

• A portion of the current stablecoin Dai market is listed below:

• Working capital, hedging and leveraged trading. The Maker vault allows users to conduct permission-free transactions, and users can generate Dai through the vault guarantee as working capital. So far, tens of thousands of vault owners have used ETH as collateral to generate Dai, and then used Dai to purchase ETH, thus realizing fully guaranteed leveraged transactions.

• Commercial receipts, cross-border transactions and money transfers. Dai can reduce the volatility of foreign exchange and eliminate the need for intermediaries, which means that the cost of cross-border transactions will be greatly reduced.

Charities and NGOs. They can use transparent distributed ledger technology.

gaming industry. Dai is an ideal currency of choice for blockchain game developers. After integrating Dai, game developers get not only a currency, but also an entire economic system. With the composability of Dai, game developers can build new player behavior mechanisms based on decentralized finance.

Predict the market. Using volatile cryptocurrencies increases the risk of betting when making uncorrelated predictions. Bettors must take into account the risk of future price fluctuations of such assets, so it is impossible to participate in relatively long-term event predictions. The stablecoin Dai is a natural fit for prediction markets.

MKR holders may be willing to incorporate new assets into the collateral class that will also be subject to Dai's risk requirements, parameters, and safety measures (e.g., liquidation rates, stability fees, deposit rates, and debt ceilings, etc.).

Summarize

Develop information input mechanisms

MakerDAO is the first reliable message input mechanism project on the Ethereum blockchain. Therefore, many decentralized applications use the MakerDAO price feed mechanism to ensure the security of the system and continuously provide the latest price data. With the guarantees provided by MakerDAO and the Maker Protocol, Maker governance can broaden the core information input mechanism infrastructure to better adapt to the needs of decentralized applications.

Summarize

All Dai is generated through over-collateralization, and the collateral is escrowed into audited and publicly visible Ethereum smart contracts. The health of the system can be monitored at daistats.com by anyone with an internet connection at any time.

appendix

With hundreds of partners in the cryptocurrency space and one of the strongest developer communities, MakerDAO has become the engine of the decentralized finance (DeFi) movement. Maker is unleashing the power of the blockchain to realize contemporary expectations for economic empowerment.

For more information, please visit the MakerDAO official website.

appendix

Advantages and Examples of Using Dai

The Maker Protocol is open to everyone, anywhere in the world, without any restrictions or requests for personal information. Below are some of the use cases of Dai around the world.

Dai Gives Everyone the Opportunity for Financial Independence

According to the Global Findex Database 2017 released by the World Bank, approximately 1.7 billion people in the world do not have bank accounts 5 . According to a 2017 survey by the Federal Deposit Insurance Corporation (FDIC), approximately 32 million households in the United States alone are unbanked or underbanked6, i.e., they have no bank accounts at all, or typically use other alternatives to traditional banking (e.g., payday loans and pawn loans) to manage their finances. Dai can empower this group of people; all they need is an internet connection.

As the world's first neutral stablecoin, Dai provides anyone with the opportunity to be financially independent, regardless of their geographic location and environment. For example, in Latin America, Dai can help individuals and households hedge against the depreciation of the Argentine peso 7 and the Venezuelan bolivar. On the South Pacific island of Vanuatu, residents pay high transfer fees. UK-based nonprofit Oxfam International, Australian startup Sempo, and ethereum startup ConsenSys have successfully piloted a cash handout program on the island of Efate, sending each of the island's 200 residents Issued 50 Dai to act as a payment medium in the local supplier network8.

Generation of Self-Sovereign Currency

Users can access the Maker protocol through Oasis Borrow and lock collateral in Maker vaults to generate Dai. Users do not need to visit any third-party intermediaries to generate Dai. Vaults give individuals and businesses the opportunity to secure assets and generate liquidity in a simple, quick and inexpensive way.

Automatic deposit income

Dai holders around the world can take advantage of the Dai deposit rate for better access to the financial system. As mentioned above, the Dai deposit rate is based on the value of Dai, allowing users to use their Dai holdings to make money and protect their deposits from inflation.

For example, suppose Bob locks 100,000 Dai in the DSR contract, and Maker governance sets the annual interest rate of DSR at 6%, then Bob can earn 6,000 Dai deposit income a year. Additionally, since exchanges and blockchain projects can integrate DSR into their platforms, this opens up new opportunities for cryptocurrency traders, entrepreneurs, and established corporations to increase their Dai holdings and working capital. Due to this attractive mechanism, Market Makers (market makers) may choose to hold Dai for a long time and lock it into DSR.

• Fast and low-cost remittance

• Whether it is to buy goods or services, or transfer money to family and friends, cross-border remittances require paying high service fees and transfer fees, waiting for long transfer times, and overcoming exchange rate problems caused by inflation. People around the world turn to the stablecoin Dai as a medium of exchange because they believe in its value and efficiency.

• Dai can bring the following benefits to remittance users:

• Low-cost domestic and international transfers. Dai provides immediate cost savings, replacing higher bank transfer fees with lower Ethereum network gas fees. Lower costs also help increase transaction frequency.

Available 24/7. Dai operates on different hours than banks. The Maker Protocol is open 24/7.

Easy exit/entry. There are many fiat exits/entries that users can take advantage of to transact between fiat and Dai. These options help users bridge the gap between fiat and cryptocurrencies, easily exchanging their Dai holdings for their local currency.

Greater security and confidence. Blockchain offers increased security that can deepen consumer trust.

Stability in High Volatility Markets

As noted above, Dai is both an easily accessible store of value and a powerful medium of exchange. It protects traders from volatility. For example, it allows traders to easily and smoothly control their positions and stay active in the market without repeatedly conducting fiat currency transactions through fiat currency exit/entry.