What is MakerDAO?
MakerDAO (DAO stands for decentralized autonomous organization) is an organization that builds technology to enable borrowing and savings capabilities. It issues a USD stable coin called DAI by allowing anyone to contribute various crypto assets as collateral and minting against that collateral. It is one of the original Decentralized Finance (DeFi) protocols built on the Ethereum blockchain.
What is the Maker protocol?
The Maker Protocol is responsible for minting DAI, a USD stable coin, by using crypto assets as collateral. Users are able to deposit assets like Ether into a smart contract “vault” and can create DAI that is backed by their deposited collateral. Users must maintain a minimum collateralization ratio in order to ensure that their collateral isn’t liquidated. Users pay the protocol an interest rate (i.e., “stability fee“) for the privilege of borrowing.
The Maker (MKR) token holders control the protocol’s stability fee. Their goal is to balance the demand for DAI and to maintain DAI’s peg to $1 USD. Interest rates fluctuate depending on the price of DAI. If DAI is trading above $1 USD, then interest rates will go down to encourage more minting of DAI, and vice versa.
The protocol also relies on the Maker (MKR) token to protect the solvency of the system. When a liquidation happens and there isn’t enough DAI recovered from liquidations, more MKR will be issued to cover the debt. If there is excess DAI recovered, the excess DAI will be used to buy some MKR and burn it.
What is the Maker (MKR) token?
The Maker (MKR) token is the governance token for the MakerDAO. MKR holders can stake their tokens to vote on critical decisions about the protocol (e.g., interest rates for DAI).
Instead of selling tokens to the general public via ICO, as many crypto platforms did, MakerDAO sold the initial 1 million MKR supply via private sales to friends and family and investors like Andreesen Horowitz and Polychain. Since MKR holders have a strong influence over the direction of the protocol, it was important to build a community of token holders committed to its long-term success.
MKR is an ERC-20 token, meaning it runs on the Ethereum blockchain. Unlike Ethereum or Bitcoin, you can’t mine the token. Instead, you can buy it on centralized or decentralized exchanges. The MKR token supply is also deflationary as the proceeds from vault liquidations are used to buy and burn Maker tokens. As of May 2021, there is a circulating supply of around 900,000 MKR with a max supply of just over 1 million.
How does Maker compare to Bitcoin?
Maker differs greatly from Bitcoin in terms of its market size, risk profile, and purpose.
First, MakerDAO (and its token, MKR), runs on the Ethereum blockchain. Bitcoin runs on its own, entirely separate blockchain: the Bitcoin blockchain. On the Bitcoin blockchain, you can earn Bitcoin through Bitcoin mining, which involves setting up a very powerful computer to run special software that solves complicated math puzzles. Since the Ethereum blockchain processes Maker transactions, you could mine Ether but not Maker.
Second, the Bitcoin blockchain only serves to process transactions. Maker, however, is just one of the many ways developers can use the Ethereum blockchain to create new types of products and applications. Maker is, as mentioned, a lending protocol; other protocols include decentralized exchanges and derivatives.
Third, Bitcoin’s market cap is a lot bigger than Maker’s. As of May 2021, Bitcoin’s market cap of $1.2 trillion dwarfs Maker’s $4.3 billion. Bitcoin is by far the most dominant coin on the market.
Fourth, the value of Maker and Bitcoin are dependent on different things—although the relationship is complicated.
Maker is dependent on the strength of the protocol it powers. If the Maker protocol breaks or is prone to a hack, then this could crash the price of MKR. In addition, although Maker is just a few years old and DeFi protocols are still a novelty, Bitcoin has been around for over a decade now and is much more battle-tested.
However, it should be noted that, although Maker is different from Bitcoin, it is far from independent from it.
Bitcoin, the coin with a larger market (by a long shot), greatly influences the price of all other cryptocurrencies. If Bitcoin crashes, there’s a good chance that Maker will feel the burn too. And if Ethereum, the coin that powers the blockchain that supports Maker, crashes, then MKR’s price could be impacted. In addition, as a lending platform that takes various crypto assets as collateral, the Maker protocol and thus potentially the MKR token’s value would react to any dramatic fluctuation in a prominent crypto asset’s value. However, if MKR crashes, Bitcoin may be less likely to get hurt by virtue of its size.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Maker, including an opinion that MKR is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of MKR prior to making it available on Wealthsimple Crypto and has concluded that MKR is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated MKR based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of Maker, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Maker;
- The supply, demand, maturity, utility and liquidity of MKR;
- Material technical risks associated with MKR, including any code defects, security breaches and other threats concerning MKR and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with Maker, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of MKR.
Like all other crypto assets, there are some general risks to investing in MKR. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, we note that as with any DeFi protocol, Maker presents a slightly elevated short history risk relative to more established cryptocurrencies like Bitcoin. Further, the Maker community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of MKR have no recourse to Maker or Wealthsimple if MKR declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading MKR. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: July 26, 2021