How Does The Protocol Work?

The protocol generates new Dai via smart contracts known as Maker Vaults. The contracts can be created through different web UIs and apps that act as portals to gain access to the network through for example Isntadapp or Oasis Borrow. Once a user wants to retrieve the collateralized crypto from the smart contract, they will have to pay back the Dai they generated along with the stability fee. The MKR token can be used to govern the Maker Protocol and the proposals will be voted on which then take the form of smart contracts and can be deployed by any Ethereum address.

The MKR holders can then vote on the proposal that they want to pass and the Ethereum address that receives more approval votes in the form of MKR which is granted with administrative access to make the changes to the protocol.

MakerDAO is used for lending the Dai stablecoin. By depositing a supporter ETH token into the Maker vault, the user generates a loan represented in DAI which gains interest. Upon reclaiming the deposited assets, they will repay the vault in the borrowed sum with the accrued fees. In the diagrams online we usually see three groups of participants in the protocol and the users represent the people that own and issue DAI via Maker Vaults while the governors are the participants who have a huge knowledge of the protocol and help maintain it and direct its development. The maintainers are the business and other participants that are using the protocol in their platforms or products but also keep the Dai peg and decentralized oracle structure.

The Maker protocol is one of the biggest decentralized applications on the Ethereum blockchain and it was the first decentralized finance application to earn huge adoption. For a long time, Maker had the most assets locked in it as per Defi Pulse analytical service but if we are going to compare it with other protocols like Aave and Compound we can see that, here, users can borrow Dai only. In the compound, users borrow tokens from 9 markets and with Aave in 20. The collateral portfolio is different on all platforms as Aave supports 20 tokens, Compound 9 and Maker 12.

The DAI savings rate smart contract lets users generate interest on DAI locked into the contract thorugh stability fees while in Aave and Compound, the interest is generated from the liquidity supply. Neither Aave nor COmpound has their own stablecoins while Maker has a governance token.