This is a chapter from the book Token Economy (Third Edition) by Shermin Voshmgir. Paper & audio formats are available on Amazon and other bookstores. Find copyright information at the end of the page.
While Bitcoin resolved the double spending problem, it lacked a stability mechanism, which Dai (DAI) set out to address. It was designed as a stable payment token pegged to the U.S. dollar, and also one of the first DeFi applications to be explicitly governed through the vehicle of a DAO called “MakerDAO.” The governance token MKR was designed to grant token holders the right to participate in decision-making processes that influence DAI’s economic policies and strategic operations. In 2024, MakerDAO initiated a rebranding to "Sky" as part of its "Endgame Plan," aiming to enhance governance and token economics.
Disclaimer: This chapter repeats certain concepts that have already been introduced in a previous chapter on Stable Tokens, but goes much deeper into the use case of MakerDAO. Since the crypto landscape is dynamic, details about these protocols are subject to frequent changes. Staying informed through official channels and recent updates is advisable.
Many early blockchain protocols, such as Bitcoin, were impractical for daily payments in stable economies due to their price volatility. These challenges prompted the emergence of stable tokens which have become indispensable building blocks to decentralized applications. The stable token Dai (DAI) and its governance institution MakerDAO stand out as early and influential examples of a decentralized approach to exchange rate stability. Despite many challenges along the way, Dai has constantly evolved and remains a landmark decentralized stable token.
Dai was conceptualized in 2014 by Rune Christensen, who introduced his idea for a stable cryptocurrency on Reddit under the name “eDollar.” It was later renamed Dai, with the goal of creating a stable token pegged 1:1 to the U.S. dollar. A combination of collectively maintained monetary policy mechanisms executed by voluntary contributors with different roles within the system was designed to guarantee that the peg would be maintained.
The first white paper was published in 2017, outlining a protocol where anyone could deposit collateral tokens into Ethereum-based smart contracts and receive newly minted DAI in return. These collateral tokens served as reserves to back the value of the stable token. Adaptive monetary policy mechanisms were designed to incentivize traders to maintain stability by offering arbitrage opportunities through various auction mechanisms. These mechanisms served as semi-automated security functions. They ensured that collateral assets held in reserve would be sold off if their price fell below a certain threshold, allowing traders to buy them at a discount and maintain exchange rate stability.
Initially, Dai relied solely on Ether (ETH) as collateral. Any ETH token holder could deposit their ETH in a smart contract to generate DAI tokens in return, which resulted in a debt position for DAI tokens. The exchange rate would be determined by the ETH-USD price. These newly issued DAI were designed to function as a de facto loan by the Maker protocol. They resulted in a debt position for which DAI owners had to pay interest, which is why these smart contracts were originally referred to as collateralized debt positions. The ETH held as collateral would only be released by the smart contract upon repayment of all DAI debts. Through this mechanism, Maker Protocol inadvertently became more than just a stable token project, as the smart contract issuing DAI, while holding collateral assets in escrow, was one of the first decentralized lending protocols of its kind. It served as a use case for other decentralized lending and borrowing protocols. The term collateralized debt position is not used anymore, and has been replaced by the term “Vault.” Many other aspects of the Maker protocol have evolved over the years, including its monetary policy parameters, collateralization mechanisms, accepted collateral types, and collective governance rules.
DAI started out with a 150 percent collateral-to-debt ratio to ensure that the system had enough excess collateral to mitigate the volatility risk. However, overcollateralization could not completely mitigate the volatility risks of ETH, leading to the introduction of “Multi-Collateral Dai” in 2019 through a series of protocol upgrades. This upgrade allowed a range of “crypto-native” assets to be used as collateral. Different collateral-to-debt ratios were implemented to account for the specific volatility risk of each underlying collateral asset.
To further reduce volatility risks, competitor stable tokens such as USDC, as well as tokenized real-world assets, were eventually accepted as collateral. At the time of writing, USDC is the dominant collateral type used for backing DAI. While this move mitigated the volatility risks associated with many crypto-native assets, it also raised controversy around the re-centralization of DAI. After all, USDC is a fiat-backed and centrally managed stable token, which exposes DAI to many of the systemic risks of traditional financial services that the founders originally set out to combat. In 2022, MKR holders approved a real-world asset vault for Société Générale, enabling the bank to borrow DAI against tokenized corporate obligations and home loans. This milestone marked the increasing integration of traditional financial institutions with decentralized protocols.
The governance structure of the stable token evolved in tandem with these developments. Initially managed by a foundation, the project transitioned to community governance, with MKR holders gaining full decision-making authority by 2021. However, challenges with voter participation and governance complexities led to the introduction of the Endgame Plan in 2024, aimed at simplifying operations. Under the Endgame Plan, MakerDAO began a rebranding to Sky, introducing new governance tokens (SKY) and a stable token (USDS) while maintaining support for the legacy tokens DAI and MKR. The idea was to allow MakerDAO and Sky to operate in parallel, providing users the choice to adopt the new ecosystem while minimizing disruptions.
Purpose & Political Principles
When Dai was created, its primary goal was to offer a stable, collectively maintained payment token suitable for Web3-based transactions. The goal was to have low exchange rate volatility, making it a reliable medium of exchange that can be easily used in any decentralized application. Given the design of the system and the statements made by the founders in the early years, it is safe to say that the system pursued two main political principles:
- Collective maintenance of the stability function: The idea was that the stability of the exchange rate should be fulfilled by various independent and autonomous participants, who would execute a series of semi-automated and adaptive monetary policy functions in exchange for network tokens.
- Collective governance of protocol upgrades: The idea was that the social governance process regarding the maintenance and evolution of the stability mechanisms should also be collectively governed.
Functional Design
The main challenge in designing the system was decentralizing monetary policy interventions in the absence of a central bank or other monetary authorities. Traditional financial institutions influence exchange rates and monetary stability through various tools, including interest rate adjustments, reserve requirements, open market operations, and direct currency interventions. In contrast, a decentralized system required novel mechanisms to replicate similar economic functions without centralized oversight.
- Decentralized collateral management: In fiat systems, central banks enforce reserve requirements for private banks through legal mandates and periodic audits. These reserves help regulate the money supply, maintain financial stability, and manage liquidity risks. To decentralize this function, collateral management needed to be restructured in a Web3-native way. The solution was a system where anyone could deposit existing collateral assets into smart contracts, ensuring that the stable token DAI remained backed by assets, thereby maintaining its value.
- Decentralized minting function & decentralized lending: The minting function also needed to be decentralized. To achieve this, DAI could only be created when users deposited collateral into a smart contract and was burned upon repayment of DAI into the contract. This structure decentralized monetary expansion and contraction, as each vault owner effectively contributed to money creation. Additionally, this system introduced a decentralized lending function, where DAI was temporarily issued against collateralized debt. Borrowed DAI was withdrawn from circulation as soon as the debt and interest were repaid. Once the borrower settled the borrowed DAI—including accrued interest—the collateral was returned to its owner, and the corresponding DAI was burned, maintaining the system’s balance. The incentive to lock collateral into a vault was the ability to access a token with a stable value without having to sell ETH or other volatile crypto assets, allowing users to retain exposure to their crypto holdings while utilizing DAI for transactions, investments, or arbitrage.
- Publicly verifiable digital vaults: DAI’s stability and security depended on transparent smart contracts enforced by blockchain nodes. This design ensured that all interactions—including tokenized asset movements, liquidations, and auctions—remained publicly verifiable at all times, reducing the risk of backdoor deals.
- Mitigating volatility of collateral assets: One of the key challenges was managing the volatility of crypto-native collateral assets such as Ether (ETH). To address this, the protocol introduced multiple auction-based mechanisms to maintain system solvency. These auctions were designed to attract capital-affluent and investment-savvy market participants by offering arbitrage opportunities, incentivizing them to stabilize the system during periods of extreme price movements.
- Reliable decentralized price feeds: For the system to function effectively, it required tamper-resistant exchange rate data across various trading platforms to determine collateral requirements and detect arbitrage opportunities. The solution was a decentralized Oracle infrastructure, where a broad set of independent nodes (Oracle Feeds) provided real-time price data. These Oracles were governed by MKR token holders, ensuring that the system remained resistant to price manipulation.
- Governance of policies: Initially, MakerDAO governance operated informally through community calls and open discussions. Over time, it was formalized under the MakerDAO governance framework, allowing MKR token holders to vote on protocol upgrades, monetary policy risk parameters, and operational decisions. The interest rate charged to vault owners was designed to act as a network tax funding protocol maintenance and ongoing operations.
- Last resort for black swan events: Given the system's permissionless nature, extreme market conditions needed to be accounted for. As a last resort, the protocol implemented an Emergency Shutdown mechanism, that could be initiated by MKR token holders, designed to halt all system operations and ensure equitable collateral redistribution if systemic risk became unmanageable. This safeguard was designed to protect users and minimize collateral losses in extreme cases.
Protocol Upgrades & Protocol Funding
In 2015, the Maker project was officially established under a Danish company, Maker Ecosystem Growth Holdings, Inc., to develop the monetary policies for DAI, governance rules for the future MakerDAO, a user interface, and advocacy efforts. Inspired by open-source principles, the founders encouraged participation through weekly governance calls, where anyone could contribute ideas and vote on milestones and protocol designs. This informal process was formalized in 2018 when the Maker Foundation was created to transition governance functions into a DAO. The foundation served as a temporary vehicle, with all governance powers ultimately transferred to MakerDAO by 2021.
- 2015–2017: The focus was on research, development, and community building. The team designed smart contracts and mechanisms to maintain DAI stability and outlined the governance role of MKR tokens.
- 2017: DAI launched. The only collateral allowed was ETH.
- 2018: The Maker Foundation was established to formalize governance and expand operations.
- 2019: The system was upgraded to Multi-Collateral DAI, allowing various crypto-native collateral types.
- 2019–2020: Additional collateral types, including less crypto-native types, were continuously introduced through a series of protocol upgrades.
- 2020: A liquidity crisis, known as "Black Thursday," required emergency governance actions and upgrades to stabilize the system.
- 2020–2021: Governance transitioned fully from the Maker Foundation to MakerDAO. Funds and intellectual property were transferred to a multisignature wallet controlled by MKR holders and a MakerDAO Core Unit. The transition marked the completion of the protocol’s evolution into a community-governed system.
Initial funding: The Maker protocol was funded through an Ethereum grant and three private funding rounds (2017–2019), where the Maker Foundation sold MKR tokens to accredited venture capital firms. Of the 1 million MKR tokens minted in 2015, a significant portion was allocated to founders, early employees, and investors to bootstrap operations. The foundation managed a “Development Fund” wallet to cover future costs associated with protocol development, such as personnel costs and other operational expenses.
Continuous funding: The protocol was designed in a way that MakerDAO could generate revenue from the stability fee collected (interest paid by vault owners for DAI loans), which in turn is used to: (i) Maintain system stability and solvency. (ii) Offer interest to DAI holders depositing into savings contracts. (iii) Cover ongoing operational costs of governing and managing the protocol.
Stakeholders
- Maker Ecosystem Growth Holdings, Inc & Maker Foundation: Initially, DAI’s development and MakerDAO’s ecosystem were managed by Maker Ecosystem Growth Holdings, Inc., and later the Maker Foundation. These entities defined the initial macroeconomic policies, bootstrapped the system, and shaped the foundation for MakerDAO. The founders and first employees greatly shaped the initial conditions of the system. Some of them have been allocated many MKR tokens and are still in key positions within MakerDAO.
- Vault owners (DAI lendees): Their role is to deposit collateral into smart contracts to min/lend DAI. Their core function is to contribute to decentralized minting and collateral management. While theoretically open to anyone, vault usage primarily benefits capital-affluent and finance-savvy participants due to the interest costs and complexity involved.
- Simple DAI owners can purchase the stablecoin on exchanges and use it for payments in other decentralized applications, or they can earn interest if they deposit DAI into savings contracts. Unlike vault owners, simple DAI owners don’t need to deposit collateral assets to engage in arbitrage opportunities. They just buy the token at the current exchange rate and use it for payments. They play a key role in driving demand for DAI in other Web3 applications.
- DAI savers is a subset of simple DAI holders or vault owners who deposit their DAI into savings contracts to earn interest. This option appeals to users seeking passive income on exiting DAI holdings, with funds being withdrawable at any time.
- Keepers were designed to ensure DAI’s stability by participating in market mechanisms, such as auctions to maintain the 1:1 USD peg. Their function is usually executed by trading bots that are programmed to profit-maximize from different arbitrage opportunities when participating in the different market mechanisms. In the white paper, the protocol designers expected Keeper bots to be operated primarily by finance-savvy individuals and capital investment companies that use the DAI for margin trading, since they have enough resources and the necessary financial and technical know-how. Keepers can have different roles and functions: (i) Auction Keepers; (ii) Market Maker Keepers; (iii) Cage Keepers; (iv) Chief Keepers. Auction Keepers ensure that there is enough collateral in MakerDAO to cover outstanding DAI debt. They prevent excess surplus from building up beyond the limits defined in the protocol through different types of auction mechanisms: Surplus Auctions, Debt Auctions, and Collateral Auctions. Market Maker Keepers facilitate market making on supported exchanges by trading DAI. Cage Keepers process all under-collateralized vaults during shutdown. Chief Keepers ensure that the active state of MakerDAO, confirmed in an executive vote by MKR token holders, is always the one with the most votes.
- MKR holders: MKR token holders are the protocol's governance backbone, voting on monetary policies, protocol upgrades, and emergency shutdowns. They bear the financial risks and rewards of these decisions, including participating in surplus auctions where MKR is burned. MKR holders would also govern over Oracle parameters and could freeze compromised Oracles using the Oracle Security Module, which incorporates a time delay for added security. While MKR token holders vote on strategic decisions impacting Dai´s macroeconomic policies and operations, so-called “Core Units” had to be instituted to execute the day-to-day management of operations and conduct protocol research.
- Core Units (CU) were designed as decentralized teams that handle MakerDAO’s operational tasks, including protocol development and maintenance. Funded through approved budgets, the units would operate semi-independently but had to report finances and progress to MKR holders. MKR holders could vote to adjust funding, remove members, or dissolve a CU. At the time of researching for this book, there are 18 active core units with different operational and strategic tasks and separate budgets. Team members would get paid in DAI on a regular basis and might receive bonuses in MKR on a case-by-case basis.
- Core Unit Facilitators: Each CU was led by a Facilitator responsible for strategy, budget management, and acting as a liaison between CUs, MKR holders, and external stakeholders. Facilitators would manage protocol improvement proposals and oversee emergency proposals when needed. They would get paid in DAI on a regular basis and might receive bonuses in MKR on a case-by-case basis.
- Outside stakeholders: The Dai and MakerDAO ecosystem interacts with the broader Ethereum network and now also the Solana network, which means that it can be influenced by economic and technical dynamics in these networks. Furthermore, any application that uses the stable token, as well as complementary or competing stable tokens, can influence the demand and supply of DAI. Regulators, financial service providers, and merchants also influence DAI’s market dynamics by choosing whether to list, support, or accept DAI and MKR.
Token Types & Token Properties
MakerDAO has two native tokens, DAI and MKR. These tokens differ significantly in their roles. While DAI is a stable asset designed for payments and lacks voting rights, MKR grants governance powers and is economically tied to the health of the system.
- DAI is soft-pegged to USD. It is minted when users deposit accepted collateral tokens into smart-contract-based vaults and is removed from circulation, or burned, when vault owners repay their debt along with the stability fee (interest). DAI can also be burned through mechanisms like Collateral Auctions, Debt Auctions, or during an Emergency Shutdown. It represents a property right as a privately owned asset and provides access rights within the system, such as paying for network services like loans. DAI does not grant governance rights. Each DAI token is fungible and equivalent in value, relying on the privacy features of the blockchain network used. Unless locked in a savings contract or other smart contract, DAI can be freely transferred to any recipient. Although the protocol theoretically imposes no supply limits, DAI’s issuance is effectively constrained by the availability of collateral tokens and the maximum caps set for each collateral type. Its stability is maintained through a combination of auction mechanisms and monetary policy parameters that can be adjusted by MKR token holders. When predefined thresholds are reached, automated market mechanisms are triggered to mint or burn DAI, preserving the soft peg to USD.
- MKR serves as the governance token for MakerDAO, enabling holders to participate in decisions regarding macroeconomic policies, protocol upgrades, and strategic operations. MKR tokens were issued as an initial funding resource and can be used for recapitalizing the protocol when necessary. Unlike DAI, MKR is not pegged to any value and has a volatile exchange rate determined by market demand and supply. MKR tokens are fungible and transferable unless temporarily locked in voting contracts, with voting rights proportional to the number of tokens held. These voting rights allow MKR holders to adjust monetary policy parameters. MKR holders can also participate in executive functions such as Surplus Auctions. MKR token holders can vote to adjust certain monetary policy parameters such as the Stability Fee, Liquidation Ratio, Liquidation Penalty, Collateralization Ratio, and Liquidation Price, as well as initiate a system shutdown. They also have the right to participate in a Surplus Auction, in which MKR tokens are burned. The token was initially issued in 2015, with 1 million tokens distributed to founders, early employees, and investors to bootstrap the system. Additional MKR tokens can only be minted through governance decisions, either to pay Core Unit member bonuses or to stabilize the protocol during crises. MKR tokens are removed from circulation in the process of a Surplus Auction or during an Emergency Shutdown.
Economic Mechanisms
The monetary and fiscal policy mechanisms of the MakerDAO protocol define how DAI is minted, burned, and controlled through semi-automated feedback mechanisms. They define how network participants are incentivized to engage in activities like buying, selling, saving, or burning DAI and MKR tokens.
- Network Taxes: Network participants pay various fees when using network services, such as the stability fee (interest paid by vault owners for borrowing DAI) and liquidation fees (processing fees that must be paid for various forms of auctions). These fees are essentially network taxes, collected in DAI, which are allocated to the Surplus Buffer and used to fund system expenses and maintain peg stability.
- Vaults: DAI tokens are issued only when sufficient collateral is deposited into a smart contract that acts as a digital vault. Overcollateralization is central to maintaining the 1:1 USD peg, requiring vault owners to ensure their collateral’s value stays above the minimum threshold. The vault is self-managed, giving users full control of their private keys and, therefore, their assets—unless a Collateral Auction is triggered.
- Collateral Auctions are designed to prevent vaults from becoming undercollateralized by liquidating collateral assets to repay outstanding DAI debts in case the prices of the collateral assets held in the vault fall below a certain ratio (“mandatory minimum”). Keeper bots can participate in those auctions when liquidations are triggered. They bid for collateral assets at discounted rates in exchange for arbitrage opportunities and must repay the vault’s DAI debt in exchange. Any potential leftover collateral is returned to the original vault owner, in which case the vault itself is not dissolved. All affected DAI is burned, except for the DAI that was collected as interest and potential leftover DAI.
- Surplus Buffer: The Surplus Buffer acts as a fail-safe to cover protocol debt if Collateral Auctions fall short. If Collateral Auctions cannot raise enough DAI from individual Keeper bots to cover the vault’s outstanding obligation, the remaining cumulative deficit from all undercollateralized vaults is converted into protocol debt. The accumulated protocol debt is repaid with the DAI previously collected in the Surplus Buffer through taxation of protocol services. If the protocol does not have enough DAI in the Surplus Buffer to repay the system debt, a Debt Auction is triggered.
- Debt Auction: In a Debt Auction, the protocol mints new MKR to recapitalize the system, thereby diluting the value of existing MKR tokens. This is similar to how central banks issue new fiat currencies to cover government expenses and/or reduce national debt, thereby diluting the value of their national currency. The remaining DAI debt is auctioned off against the newly issued MKR tokens. The aim is to find new vault owners willing to pay the outstanding collateral to cover the debt of all undercollateralized vaults in exchange for newly minted MKR. Debt Auctions do not liquidate DAI but transfer debt positions to new holders, maintaining DAI circulation. Since the introduction of multi-collateral DAI, the probability of a Debt Auction has decreased. Debt Auctions are only likely to happen if several collateral types rapidly lose value, which has so far happened only once—in 2020, in the event now referred to as “Black Thursday.”
- Emergency Shutdown Module: The Emergency Shutdown Module serves as a contingency for protocol upgrades and as the last line of defense against malicious attacks, critical bugs, and other unexpected events that destabilize the system. It was designed to halt MakerDAO operations and allow vault owners to reclaim their collateral. Shutdowns can be initiated only by MKR token holders, either by burning 50,000 MKR tokens or through an executive vote by MKR holders. In this case, all collateral tokens are returned to vault owners after deducting DAI debt and fees, with a time delay to ensure auctions conclude before withdrawals. Both burned MKR and repaid DAI are permanently removed from circulation. The amount of collateral vault owners receive back depends on the actual amount of debt and the exchange rate between DAI and their collateral tokens at the time of Emergency Shutdown. If the protocol has a deficit of 5 percent, vault owners may only be paid back assets worth 0.95 USD for each DAI. Such a deficit could be triggered by a particular vault, one collateral type, or another event within the MakerDAO system.
- Savings Module: The Savings Module was designed to provide DAI holders with yield in addition to stability. It allows DAI holders to earn interest by locking their tokens in the so-called “Pot Contract.”
- Flash Mint Module: The Flash Mint Module allows anyone to mint DAI up to a limit defined in the MakerDAO protocol, but only under the condition that the lender can repay the loan plus interest in the form of DAI tokens within the same blockchain transaction in which they are borrowed—otherwise, all transactions are void. This means that the actual total supply of DAI tokens in circulation is never affected. Flash loans offer arbitrage opportunities between the buy and sell price of DAI, from which one can profit in case of deviation from the USD peg. Their purpose is to help maintain the peg and generate more liquidity and market efficiency for DAI while making DAI safer from potential market manipulation.
- Surplus Auction: If the Surplus Buffer reaches a certain threshold (when the central bank has too much money), the Surplus Auction mechanism is triggered, allowing MKR holders to bid on surplus DAI. The winning bidder pays in MKR, which is subsequently burned, reducing the circulating supply and potentially increasing the value of remaining MKR. MKR holders were expected to benefit from this since the reduction of MKR token supply—given steady demand for MKR—would lead to an increased price. The protocol designers assumed that the resilience and competitiveness of the DAI stable token system would determine the overall demand for DAI and—to a certain extent—also the MKR price.
Economic Parameters
The aforementioned mechanisms are governed by a set of adjustable economic parameters that regulate the supply and demand of DAI, enabling the system to adapt to evolving conditions within decentralized applications and broader global economic trends. Key parameters include collateral types, collateralization and liquidation ratios, debt ceilings, stability fees, the Surplus Auction threshold, and the Dai Savings Rate. MKR token holders can modify these parameters through governance votes in response to shifts in DAI and MKR supply and demand, as well as changes in global monetary policies impacting fiat currencies and the exchange rate conditions of DAI.
- Collateral types: Initially, DAI relied on a single collateral type, ETH, but now accepts a variety of assets to mitigate volatility risks.
- Debt ceiling: The debt ceiling defines the maximum amount of DAI that can be issued against each collateral type, limiting exposure to the volatility of any single asset class and ensuring system stability.
- Collateralization ratio: Similarly, the collateralization ratio determines the maximum amount of DAI a vault owner can borrow relative to their collateral's value. This ratio varies by collateral type and is adjusted to reflect the asset's risk profile.
- The liquidation ratio specifies the minimum collateralization level required to prevent the liquidation of a vault. If the collateralization ratio falls below this threshold, the system initiates a Collateral Auction.
- Liquidation penalties, charged during these auctions, incentivize vault owners to maintain adequate collateralization at all times.
- Stability fee: The stability fee, an annualized interest rate calculated per second for holding a vault, reflects the volatility of the underlying collateral and serves as a significant revenue source for the MakerDAO system.
- Surplus Auction threshold: The Surplus Auction threshold defines the level at which surplus DAI in the protocol’s buffer triggers a Surplus Auction. This threshold is set intentionally high to prevent frequent auctions.
- Dai Savings Rate: Adjusting the Dai Savings Rate allows MKR holders to influence DAI demand and circulation. A higher savings rate encourages saving, reducing the circulating supply and raising the DAI price when it falls below 1 USD. Conversely, a lower savings rate increases the circulating supply, stabilizing the price when it exceeds 1 USD.
- Debt Ceiling of Flash Mint Module refers to the maximum amount of DAI that can be loaned in a flash transaction.
Policymaking & Execution
Anyone interested in contributing to the MakerDAO system, including non-MKR token holders, can submit a "Maker Improvement Proposal" (MIP) to propose changes to the system rules. In practice, however, most proposals come from Core Unit members, who are compensated for their contributions and have the necessary insights into the system's day-to-day operations. Only MKR token holders can vote on a specific proposal, which is discussed in online town hall meetings where community members are also invited to provide feedback and suggest amendments, regardless of whether they hold MKR tokens. While discussions surrounding protocol improvements occur off-chain on Web2 social networks, the voting itself is conducted on-chain.
- Signal Threads play a key role in collecting community feedback and building consensus for protocol improvements. Participation in these threads does not require MKR tokens, allowing for broad engagement. The intention is to gather a wide range of opinions before MKR holders cast their votes in on-chain Governance Polls.
- Governance Polls, facilitated by elected Governance Facilitators, are used to measure the sentiment of MKR holders regarding a specific proposal. These polls ensure that there is enough support before the proposal is elevated to an Executive Vote.
- Executive Votes are the final step in the decision-making process. Participating in on-chain voting requires MKR token holders to temporarily lock their tokens into a "Voting Contract" until the voting concludes and to pay blockchain network fees. As a result, voting involves both a financial commitment in the form of MKR tokens and the additional cost of transaction fees, making the voting process less inclusive. MKR holders can either vote directly or delegate their tokens to a representative, such as a "Shadow Delegate" or a "Recognized Delegate."
- Governance Security Module: The Governance Security Module introduces a grace period between the approval of a protocol change and its implementation. This delay provides time to identify and address any potential vulnerabilities or malicious proposals that might compromise the system's integrity. It acts as a safeguard to ensure that protocol changes align with the best interests of the MakerDAO community.
- Forum Polls offer an alternative channel for gauging community sentiment on a variety of issues, not only protocol improvements. Unlike Signal Threads, Governance Polls, and Executive Votes, Forum Polls do not adhere to specific guidelines and serve as an informal space for discussion.
Power Structures
- Policymaking power: The initial policies encoded in the MakerDAO protocol were established by its founders and first employees. While the system theoretically allows anyone to submit a Maker Improvement Proposal without being a Core Unit member or an MKR token holder, in practice, most proposals are made by paid Core Unit members or individuals closely connected to the original team, including founder Rune Christensen—simply because they have the necessary insights and time to develop informed proposals. Core Unit managers have the power to pass them on for Executive Votes, which can ultimately only be voted upon by MKR token holders.
- Voting power: MKR token holders have exclusive voting rights for protocol changes. Other stakeholders directly affected by the system, such as vault owners and DAI users, lack voting power unless they also hold MKR tokens—challenging the narrative of “community governance” that was emphasized by MakerDAO in its early years. Instead, the system mirrors the governance structure of publicly traded companies, where influence is proportional to the number of tokens held. Founders, early investors, and initial employees received disproportionate shares of MKR tokens, granting them significant influence over decisions. This concentration of power has raised concerns about inclusivity, particularly as voter apathy among MKR holders is high. In practice, only a small number of individuals participate in Executive Votes. Very often, votes were passed solely with the participation of the founder, Rune Christensen, one of the largest token holders and a key figure in the protocol’s strategic direction. The increasing complexity of MakerDAO’s operations has further limited active participation, as most network stakeholders lack the time and expertise to fully engage. This raises important questions about how inclusive the system truly is when voting rights are underutilized.
- Market power: Vault owners can exert direct market power within the Maker ecosystem by minting or burning DAI. They also represent a primary revenue source for the system, as they pay stability fees and other network fees. Simple DAI holders, who acquire their tokens on secondary markets, can influence demand and circulation by buying DAI, using DAI for payments, trading, or integrating it into other DeFi protocols. The broader adoption and utilization of DAI by merchants, exchanges, and decentralized applications significantly impact the token’s market dynamics, as these entities effectively decide whether to list or accept DAI and MKR tokens.
- Executive power: Vault owners execute the minting and burning function. DAI savers contribute to the execution of one of the stability functions of the system. Keeper bots have the power to contribute to the execution of stability mechanisms and general system solvency. If they do not participate in auctions, the stability mechanisms of DAI will collapse. MKR token holders have executive powers to trigger an emergency shutdown. Oracles have executive power over the integrity of the data that trigger the market mechanisms to maintain stability, ensure the smooth execution of system functionalities, and support long-term sustainability.
Purpose & Reality
- Stable value: Despite significant challenges and market turbulence affecting its underlying assets and the broader DeFi landscape, DAI has managed to maintain relative stability over the years. However, one major criticism is the increasing dominance of centrally governed stable tokens and real-world assets in its collateral basket, which diverges from the original vision of a decentralized stable token backed exclusively by crypto-native assets.
- P2P money: Over the years, DAI’s P2P character has increasingly eroded. While vaults remain largely self-custodial, allowing for wallet-to-wallet or wallet-to-smart-contract transactions, most simple DAI users acquire the token through secondary exchanges, often relying on custodial wallet providers where they do not control their private keys.
- Collectively maintained money: Unlike many other stable token projects, such as asset-backed stable tokens like USDT or USDC or central bank digital currencies, DAI’s stability function is collectively maintained. DAI has proven to be a permissionless system where anyone can create vaults or become a Keeper of the stability function—though in practice, participation requires financial market know-how and/or deep enough pockets.
- Collective governance: MakerDAO’s founders were inspired by crypto-anarchist principles, favoring open participation and minimal formal governance, similar to early blockchain networks. However, as the project expanded, structured governance became necessary and was implemented through a DAO smart contract. Despite being branded as a "community-governed" system, MakerDAO has faced criticism for its governance structure. Early insiders, including founders, investors, and employees, received large allocations of MKR tokens, giving them disproportionate influence. Many key stakeholders, such as vault owners and DAI users, have no voting power unless they also hold MKR. Additionally, voter participation has been low, often dominated by a few large MKR holders, leading to governance conflicts and decisions driven by influential actors. These shortcomings led to the introduction of the "Endgame Roadmap," which aims to simplify governance and encourage broader participation.
Endgame Roadmap & Rebranding
To address long-standing governance challenges and improve the token design, MakerDAO introduced a transformative roadmap known as “Endgame.” Proposed by the founder, this series of changes was extensively discussed within the MakerDAO community and ratified through a set of Maker Improvement Proposals (MIPs) in 2022. The primary objective was to reorganize the ecosystem by replacing the Core Unit structure with SubDAOs to make the governance process more self-sustaining and reduce complexities. The protocol designers also announced the transition to the Solana blockchain, moving away from the Ethereum ecosystem while remaining on an Ethereum-compatible blockchain infrastructure.
Eventually, a rebranding from “MakerDAO” to “Sky” was also proposed along with those changes. Rebranding was initiated in 2024, introducing two new tokens: SKY (replacing MKR) and USDS (replacing DAI). Users had the option to upgrade their DAI to USDS at a 1:1 ratio, but DAI continues to function within the ecosystem. However, the rebranding process has not been without challenges, including community confusion and criticism. In response, discussions in October 2024 considered reverting to the MakerDAO brand. Despite this, a governance vote in November 2024 resulted in 79 percent of participants supporting the continued use of the Sky brand.
At the time of writing, both the MakerDAO and Sky platforms are operational to ensure a smooth transition. MakerDAO continues to support DAI and MKR, while Sky promotes USDS and SKY. Users are not required to migrate and may choose between DAI and USDS or retain MKR tokens instead of upgrading to SKY. This dual-system approach was chosen to allow users to adopt the new ecosystem at their own pace. At the time of research, the final outcome of this and adoption rate are still unclear.
Next: Steemit, Hive, Friend.tech & Co →
Footnotes
[1] In traditional currencies, a soft peg is determined by the foreign exchange market, with the government intervening where necessary to strengthen or weaken the currency. In a hard peg, the government decides on an exchange rate and intervenes to keep the peg by changing interest rates, or directly trading the currency on the market. With MakerDAO's stable token Dai, a soft peg option is used. Dai tokens don't stick to 1 DAI= 1 USD exactly, the goal of the stability mechanisms is to float around the target price.
[2] During round 1 in 2017, 40,000 MKR were issued against a total of 12 million USD at a valuation of 300 USD per MKR to Andreessen Horowitz, Polychain Capital, Distributed Capital Partners, Scanate, FBG Capital, Wyre Capital, Walden Bridge Capital and 1Confirmation. In 2018, 60,000 MKR were issued to raise 15 million USD at a valuation of 250 USD per MKR from A16z Crypto. In 2019, 55,000 MKR were issued to raise 27.5 million USD at a valuation of 500 USD per MKR from Paradigm and Dragonfly Capital.
[3] Ethereum Virtual Machine or EVM is the processing logic that is executed by the Ethereum network and which is responsible for executing smart contracts. Many other blockchain networks are EVM compatible. Solana is one of those EVM-compatible blockchain networks.