When Tether (USDT) was launched in 2014, it was a centralized stablecoin: Tether Ltd holds dollar reserves and issues tokens. DAI, launched by MakerDAO in 2017, proved a different model was possible: a stablecoin maintained by smart contracts, over-collateralized with crypto assets, governed by MKR token holders, with no central company holding reserves. DAI survived the 2018 crypto crash, the 2020 Black Thursday (ETH -50% in 24 hours), the 2022 UST/LUNA collapse, and numerous protocol attacks.
How MakerDAO's Vault System Works
To create DAI, a user deposits collateral (ETH, WBTC, stETH, USDC, and 20+ approved assets) into a Maker Vault smart contract and borrows DAI against it. The system requires over-collateralization: each dollar of DAI minted requires more than $1 of collateral (minimum 150% for most collateral types, higher for riskier assets). This over-collateralization creates a buffer against price drops.
If the collateral value falls below the liquidation ratio, anyone can trigger a liquidation auction. Liquidators bid DAI to purchase the collateral at a discount; the DAI received is burned (destroyed). This contraction of DAI supply helps maintain the peg from the supply side. Vault owners face a stability fee (annual interest rate, currently 5-8% for ETH vaults) denominated in DAI.
The DAI Savings Rate (DSR): any DAI holder can deposit DAI into the DSR module and earn interest (currently 5-8% APY). This provides demand for DAI — holding DAI earns interest, similar to a savings account. The DSR rate is set by MKR governance and adjusts based on DAI peg stability.
- ✓Vault (CDP): deposit collateral, borrow DAI at 150%+ collateralization ratio
- ✓Over-collateralization: protects peg through cushion against collateral price drops
- ✓Liquidation: under-collateralized vaults liquidated via auction; DAI burned
- ✓Stability fee: annual interest on DAI borrowed (5-8% typical for ETH)
- ✓DAI Savings Rate (DSR): earn interest on DAI deposits — demand driver for DAI
- ✓Governance: MKR holders set stability fees, DSR, collateral types, risk parameters
MKR Token: Governance and Risk Absorption
MKR serves two critical functions: governance (MKR holders vote on all protocol parameters) and risk backstop (if DAI ever becomes under-collateralized, new MKR is minted and auctioned to cover the shortfall — diluting MKR holders). This makes MKR holders deeply incentivized to govern the system responsibly.
MKR accrues value through burns: when stability fees are collected from vault borrowers, the DAI fees are used to buy MKR on the open market and burn it. With substantial DAI supply ($4B+) and stability fees of 5-8%, hundreds of millions of DAI per year are available for MKR buybacks. This creates deflationary pressure on MKR supply over time.
MKR governance covers: approving new collateral types, setting risk parameters (liquidation ratios, debt ceilings), adjusting stability fees and DSR, emergency shutdown procedures, and major protocol upgrades. Governance proposals require MKR votes and typically have 48-72 hour delay periods for security.
- ✓MKR governance: all protocol parameters voted by MKR holders
- ✓MKR as risk backstop: minted and sold to cover bad debt if system is insolvent
- ✓MKR burn: stability fee revenue used to buy and burn MKR (deflationary)
- ✓Emergency shutdown: last resort mechanism to wind down the system safely
- ✓Governance history: passed 1000+ executive votes governing the protocol
- ✓Vote delegation: MKR holders can delegate votes to recognized delegates
The Sky Rebrand and Endgame Plan
In 2024, MakerDAO founder Rune Christensen launched the 'Endgame' plan — a multi-year protocol restructuring. As part of this, MakerDAO rebranded to Sky Protocol. DAI was supplemented by USDS (a new stablecoin with full-upgrade ability), MKR was renamed to SKY, and the protocol began restructuring into 'SubDAOs' — specialized independent mini-DAOs built on the Maker protocol.
The Endgame plan is controversial: some MKR holders supported the restructuring as necessary for growth; others viewed the DAI→USDS transition and new tokenomics as dilutive or overly complex. The Sky rebrand attempt to make the protocol more accessible but created community fragmentation.
DAI continues to operate alongside USDS under the Sky umbrella. The original DAI mechanics remain unchanged; DAI holders can optionally upgrade to USDS for additional features. As of 2026, the Endgame restructuring is still in progress with SubDAOs at various stages of deployment.
- ✓Endgame plan: major protocol restructuring into SubDAOs for scalability
- ✓Sky rebrand: MakerDAO → Sky Protocol, MKR → SKY (2024)
- ✓USDS: new stablecoin alongside DAI, with compliance features
- ✓SubDAOs: independent specialized DAOs built on Maker infrastructure
- ✓Community controversy: Endgame plan polarized MKR governance community
- ✓DAI continuity: original DAI mechanics unchanged, coexists with USDS
Frequently Asked Questions: MakerDAO and DAI
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