1. What is MakerDAO?

MakerDAO is a DeFi protocol that issues:

• DAI → a decentralized stablecoin

• Backed by crypto collateral

  
  

Its goal:

Key Insight

2. The Core Mechanism

How DAI is Created:

1. Users deposit collateral (e.g., ETH)

2. Borrow DAI against it

3. Must maintain a safe collateral ratio

   
   

Core Relation

👉 Example:

• Deposit $150 worth of ETH

• Borrow $100 DAI

To borrow DAI:

• You must deposit more value than you borrow

  
  

👉 This ensures safety

3. Why Overcollateralization Matters

Protection Mechanism:

If collateral value drops:

• Position becomes risky

• System can liquidate

👉 This protects DAI’s peg

Without collateral:

• No backing

• No stability

👉 This is where many systems fail

4. Stability Mechanisms

1. Stability Fees

• Borrowers pay interest

• Controls supply

👉 Higher fees → less borrowing

2. Liquidations

• Undercollateralized positions are liquidated

👉 Prevents system insolvency

3. Peg Arbitrage

If DAI ≠ $1:

• Traders exploit price differences

• Market pushes price back

👉 Self-correcting mechanism

4. Collateral Diversity

• Multiple asset types

• Reduces dependency on one asset

👉 Improves resilience

5. Why MakerDAO Works

Key Strengths

1. Real Backing

• DAI is backed by assets

  
  

2. Strong Risk Controls

• Liquidations

• Collateral ratios

  
  

3. Market-Driven Stability

• Arbitrage mechanisms

  
  

4. Governance Adjustments

• Parameters can change

  
  

6. MakerDAO vs Algorithmic Stablecoins

Algorithmic Model (e.g. Terra)

• No real collateral

• Relies on confidence

  
  

MakerDAO Model

• Backed by assets

• Risk managed

👉 This is the key difference

7. Risks in MakerDAO

Not Risk-Free

Collateral Volatility

• Crypto prices can crash

  
  

Liquidation Cascades

• Mass liquidations during downturns

  
  

Governance Risk

• Decisions may be flawed

👉 But still more robust than many systems

8. Key Lessons from MakerDAO

Lesson 1

Lesson 2

Lesson 3

Lesson 4

9. Operator Framework

When evaluating stablecoins, ask:

1. What backs the stablecoin?

2. Is collateral sufficient?

3. How are risks managed?

4. What happens during market stress?

👉 These determine stability

10. Real Insight (Critical)

👉 Without these → systems fail

Final Takeaway

MakerDAO maintains stability because of:

✅ Overcollateralization

✅ Risk management

✅ Market incentives

✅ Governance controls

👉 The real reason: