What Is MakerDAO?

Users lock accepted assets such as ETH as collateral in smart contracts called vaults and mint DAI in return. The system is based on the principle of overcollateralization: the value of the DAI minted must be lower than the value of the locked collateral. If the collateral ratio falls below the set threshold, the vault is liquidated and the collateral is sold at auction to cover the debt. When the user repays their debt together with the stability fee, the DAI for the principal amount is burned and the collateral is released.

MKR holders vote on matters such as which assets are accepted as collateral, fee rates and risk parameters. Over time, stablecoins such as USDC and tokenized real-world assets (RWA) were also added to the protocol's collateral structure; this led to debates about decentralization. In 2024, the project rebranded as Sky and introduced the USDS stablecoin and the SKY token.

As one of the first major stablecoins not backed by reserves held by a centralized company at a bank, DAI became one of the building blocks of DeFi. However, strain on the liquidation mechanism during sudden price crashes, smart contract risks and the share of centralized assets in the collateral are the protocol's main risk factors.