The MakerDAO platform (from “market maker”) leverages the logic of Ethereum’s design rationale to assemble, through a series of smart contracts, a stability engine which dynamically hedges a 1:1 soft peg to the US dollar (and possibly the minting of an IMF currency basket pegged ‘Dai’ in the future, if so voted by the DAO).
The way this is achieved is through Collateralized Debt Positions (CDPs) and autonomous feedback mechanisms. The latter is triggered in the event of severe market instability, resulting in the automatic dilution of MKR tokens and their selling off on the open markets to compensate for the collateral translating the Dai stablecoin.
The MKR token holders are collectively responsible for attuning the parameters of any given CDP. Initially only Pooled Ether (PETH, or just ETH for simplification) is supported as a CDP, but many others will be gradually included as the system continues to stabilize and working mechanisms are tested and proved.
All this introduces a particularly clever mechanism to decouple from the hierarchy of the Bitcoin dominated ‘crypto’ markets and open up towards global capital flows. The collateral portfolio will be continuously diversified to include things like gold-backed Proof-of-Asset DGX tokens (further secured by providing jurisdictional and counter-party protections in Singapore’s regulatory environment).
At the moment, where Maker is especially useful is, for example, when one wants to cash out some of his Ether, but believes the price will keep growing – so the Maker platform allows that one can lock his ETH in a CDP contract and get a specified amount of money in return, getting back that ETH whenever that very same amount is paid (while the ETH can fluctuate in any direction within the specified threshold of a liquidation price).
Here, the possibility of leverage (margin trading) already emerges, as one can use Dai to buy more Ether. One must, however, be careful and exercise caution, keeping track of things and doing the math right (there have already been sob stories of liquidated CDPs one can quickly find on the subreddits). Here is a quick guide on how to leverage a long position on ETH.
An interface of integrated platform tools is available on the Oasis dapp — a specialized on-chain DEX (Decentralized Exchange) for token assets on the Maker registry which focuses on efficiency with large orders. The current SimpleMarket implementation doesn’t come with a matching engine, but this is intended to be additionally implemented on an extended layer.
Upon access, Oasis deploys a series of contracts on mainnet and both Ropsten and Kovan testnets – user interface automatically detects to which one the client is connected and binds to the right contracts accordingly. The MakerOTC contract enables the trading of ERC-20 standard compliant tokens (presently ETH, MKR, DGD, REP, ICN, 1ST, SNGLS, VSL, PLU, MLN and DAI) with a token wrapper additionally provided (wrapped tokens prefixed with “W”) which, in the case of W-ETH for example, encapsulate “normal” Ether, attaching properties which make it behave less like currency and more like a token (then easily exchangeable for other tokens on decentralized platforms).
The DAI explorer is the interface that enables the creation and funding of CDPs and the withdrawal of Dai from them. However, at the present stage, Dai can be converted via the USD pairs (ETH or BTC) on traditionally centralized exchanges (like GDAX) which poses possible slippages and exchange fees across the hops.
It must be emphasized that MakerDAO is in an early, experimental phase, but many fascinating proposals keep piling up and stirring discussions (technical, theoretical and otherwise). Among these a proposed diversification of the MKR reserves whereby systemic risk is divided into multiple strategies enabling it to assess complex types of Black Swan events.