Principle and design goals

Technology implementation

Consensus mechanism

Accounts and transactions

The CDP interaction process

• Step 1: Creating the CDP and depositing collateral

  The CDP user first sends a transaction to Maker to create the CDP, and then sends another transaction to fund it with the amount and type of collateral that will be used to generate Dai. At this point the CDP is considered collateralized.

• Step 2: Generating Dai from the collateralized CDP

  The CDP user then sends a transaction to retrieve the amount of Dai they want from the CDP, and in return the CDP accrues an equivalent amount of debt, locking them out of access to the collateral until the outstanding debt is paid.

• Step 3: Paying down the debt and Stability Fee

  When the user wants to retrieve their collateral, they have to pay down the debt in the CDP, plus the Stability fee that continuously accrue on the debt over time. The Stability Fee can only be paid in MKR. Once the user sends the requisite Dai and MKR to the CDP, paying down the debt and Stability Fee, the CDP becomes debt free.

• Step 4: Withdrawing collateral and closing the CDP

  With the Debt and Stability Fee paid down, the CDP user can freely retrieve all or some of their collateral back to their wallet by sending a transaction to Maker. Single-Collateral Dai vs Multi-Collateral Dai Dai will initially launch with support for only one type of collateral, Pooled Ether. In the next 6-12 months we plan to upgrade Single-Collateral Dai to Multi-Collateral Dai. The primary difference is that it will support any number of CDP types. ³

Smart contract system

Collateralized Debt Position Smart Contracts

Anyone who has collateral assets can leverage them to generate Dai on the Maker Platform through Maker’s unique smart contracts known as Collateralized Debt Positions. ²

CDPs hold collateral assets deposited by a user and permit this user to generate Dai, but generating also accrues debt. This debt effectively locks the deposited collateral assets inside the CDP until it is later covered by paying back an equivalent amount of Dai, at which point the owner can again withdraw their collateral . Active CDPs are always collateralized in excess, meaning that the value of the collateral is higher than the value of the debt.

Cryptography

Distributed storage protocol

Cross-chain and exchange technology

Special technology

Economic model and incentive

Target Rate Feedback Mechanism

In the event of severe market instability, the Target Rate Feedback Mechanism (TRFM) can be engaged. Engaging the TRFM breaks the fixed peg of Dai, but maintains the same denomination.

The TRFM is the automatic mechanism by which the Dai Stablecoin System adjusts the Target Rate in order to cause market forces to maintain stability of the Dai market price around the Target Price. The Target Rate determines the change of the Target Price over time, so it can act either as an incentive to hold Dai (if the Target Rate is positive) or an incentive to borrow Dai (If the Target Rate is negative). When the TRFM is not engaged the target rate is fixed at 0%, so the target price doesn’t change over time and Dai is pegged. When the TRFM is engaged, both the Target Rate and the Target Price change dynamically to balance the supply and demand of Dai by automatically adjusting user incentives for generating and holding Dai. The feedback mechanism pushes the market price of Dai towards the variable Target Price, dampening its volatility and providing real-time liquidity during demand shocks.

With the TRFM engaged, when the market price of Dai is below the Target Price, the Target Rate increases. This causes the Target Price to increase at a higher rate, causing generation of Dai with CDPs to become more expensive. At the same time, the increased Target Rate causes the capital gains from holding Dai to increase, leading to a corresponding increase in demand for Dai. This combination of reduced supply and increased demand causes the Dai market price to increase, pushing it back up towards the Target Price.

The same mechanism works in reverse if the Dai market price is higher than the Target Price: the Target Rate decreases, leading to an increased demand for generating Dai and a decreased demand for holding it. This causes the Dai market price to decrease, pushing it down towards the Target Price.

This mechanism is a negative feedback loop: Deviation away from the Target Price in one direction increases the force in the opposite direction.

Governance mechanism

MKR Token Governance

In addition to payment of the Stability Fee on active CDPs, the MKR token plays an important role in the governance of the Maker Platform.

Governance is done at the system level through election of an Active Proposal by MKR voters. The Active Proposal is the smart contract that has been empowered by MKR voting to gain root access to modify the internal governance variables of the Maker Platform. Proposals can be in two forms: Single Action Proposal Contracts [SAPC], and Delegating Proposal Contracts [DPC].

Single Action Proposal Contracts are proposals that can only be executed once after gaining root access, and after execution immediately applies its changes to the internal governance variables of the Maker Platform. After the one-time execution, the SAPC deletes itself and cannot be re-used. This type of proposal is what will be used during the first phases of the system, as it is not very complicated to use, but is less flexible.

Delegating Proposal Contracts are proposals that continuously utilize their root access through second layer governance logic that is codified inside the DPC. The second layer governance logic can be relatively simple, such as defining a protocol for holding a weekly vote on updated risk parameters. It can also implement more advanced logic, such as restrictions on the magnitude of governance actions within defined time periods, or even delegating some or all of its permissions further to one or more third layer DPCs with or without restrictions.

Any Ethereum account can deploy valid proposal smart contracts. MKR voters can then use their MKR tokens to cast approval votes for one or more proposals that they want to elect as the Active Proposal. The smart contract that has the highest total number of approval votes from MKR voters is elected as the Active Proposal.

Applications

Addressable Market

As mentioned in the introduction, a cryptocurrency with price stability is a basic requirement for the majority of decentralized applications. As such, the potential market for Dai is at least as large as that of the entire blockchain industry. The following is a short, non-exhaustive list of some of the immediate markets (in both the blockchain and the wider industry) for the Dai Stablecoin System in its capacity as a cryptocurrency with price stability and its use case as a decentralized margin trading platform:

• Prediction Markets & Gambling Applications: When making an unrelated prediction, it is obvious not to want to increase one’s risk by placing the bet using a volatile cryptocurrency. Long term bets become especially infeasible if the user has to also gamble on the future price of the volatile asset used to place the bet. Instead, a cryptocurrency with price stability like Dai will be the natural choice for prediction market and gambling users.
• Financial Markets; Hedging, Derivatives, Leverage: CDPs will allow for permissionless leveraged trading. Dai will also be useful as stable and reliable collateral in custom derivative smart contracts, such as options or CFD’s.
• Merchant receipts, Cross-border transactions and remittances: F oreign exchange volatility mitigation and a lack of intermediaries means the transaction costs of international trade can be significantly reduced by using Dai.
• Transparent accounting systems: Charities, NGO’s and Governments will all see increases in efficiency and lower levels of corruption by utilizing Dai.