MKR is the utility and governance token for the decentralized lending platform Maker, an Ethereum-based decentralized autonomous organization (DAO). It is an ERC-20 token that represents an investment into the Maker Project. Additionally, MKR fluctuates with the price of DAI (a stablecoin native to the Marker protocol) to ensure the stablecoin remains at $1 and gives holders the opportunity to receive interest from outstanding deposits.
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A brief history
The Maker protocol was launched in December 2017 as a Single Collateral Dai (SCD) protocol. Maker attempts to rectify multiple issues encountered in the traditional financial sector such as transparency and volatility. Marker’s staff publishes recordings from every meeting for all users to review, and the platform addresses volatility through its DAI stablecoin. The DAI token has had great success maintaining its peg at $1 and has become one of the most well-known algorithmic stablecoins. In November 2019, MakerDAO upgraded from an SCD to a Multi Collateral Dai (MCD) protocol.
MKR in practice
Dai is backed by collateral (ether). To create DAI you move ether to a “collateralized debt position” known in shorthand as a CDP. CDP is a type of smart contract that lives in the Maker ecosystem. The Maker CDP smart contract collects ether and lets you take out a loan in DAI. If the value of ether goes below a certain threshold, you either pay back the smart contract or it will auction off your ether to the highest bidder. Once your ether is in the CDP smart contract, you are able to create DAI. To ensure that DAI stays pegged to the dollar, Maker will liquidate CDPs- usually before the value of the ether is less than the amount of DAI it is backing. Should the collateral in the system not be enough to cover the amount of DAI in existence, MKR is created and sold onto the open market in order to raise the additional collateral, providing a strong incentive for MRK holders to govern the system and responsibly regulate the parameters at which CDPs can create DAI. In return for regulating the system properly, MKR holders are rewarded with fees.