Is MKR ( Maker ) token a good investment? What is MakerDAO?
An engrossing silent project that is exponentially growing in the world of crypto performing millions of dollars worth of transactions on daily basis. Let’s cover the loan system concerning cryptocurrency. Is Maker the only loan lending system in all decentralized exchanges? Of course NO!
MakerDAO & MKR tokens
MakerDAO is a protocol (set of standards) and MKR is the governance token or coin. MakerDAO (Decentralized Autonomous Organization) has a fully autonomous programmatic lending system that has genuinely revolutionized the way you can borrow money online and pay it back with the lowest interest rate unimaginable. The interest rate on the system is 0.5%, if the same loan had to be taken via a traditional bank the interest would be between 10-15%. For example, if you would want to borrow 100,000USD, the interest would be 500USD on this decentralized system.
So how did MakerDAO make this even possible? Let’s take a real-world example where if you would want to take a loan using collateral. You go to a bank submit your collateral details and get the loan from a bank, you pay the premium and interest for the loan during the tenure. In case if you are unable to repay, the bank sells the collateral in the market and closes the loan. Likewise, you can take a loan in the MakerDAO system by using Ether as collateral, you can withdraw up to 66% of the Ether value you lock up. In other words, you would need to collateralize 1.5 times the loan you require, in Ether. Say you want a loan of 10,000 USD, you need to lock up 14,000 USD value of Ether in the MakerDAO system. Then the system automatically deposits the loan in your crypto wallet as a DAI token. Wait! Whats DAI? It’s simple means to lend in Chinese. You can convert the DAI tokens in any cryptocurrency exchange to fiat money, i.e dollars, euro etc., To repay the loan, you again need to buy DAI tokens in the exchange for the fiat money, with interest and unlock your Ether collateral by closing the loan process.
MKR tokenDAI is a stable coin i.e. the price never changes, it’s always 1USD. Therefore, the loan you get from Maker DAO is given as DAI tokens. If you take a 10,000 USD loan, you get 10,000 DAI tokens deposited in your crypto wallet. That can be converted to any money in any crypto exchange. Every time you lock up Ether to generate a loan, the MakerDAO system creates new DAI tokens for you. While you repay the loan, you inclusively pay back the principal as DAI tokens that are immediately burnt or destroyed by the system to maintain the overall supply in the market. Because DAI exists only proportional to the debt it’s backed with i.e. Ether to maintain stability. On the other hand, the MKR token is the governance token in the MakerDAO system, where the value fluctuates like a normal cryptocurrency. When you pay back the loan principal amount in DAI tokens, you repay the 0.5 % interest in MKR tokens which is called the stability fee. These MKR tokens are also burnt and destroyed immediately as an incentive to the governance community holding the MKR token. Consequently, as more loans are paid back more MKR tokens are destroyed thus reducing the supply in the market and increasing the demand for it. Thus, the price is always increasing. The present supply of MKR tokens in the market is around 1 million. The 3 distinctive components of the Maker DAO lending platform which makes it a fully autonomous mode areDai tokens
Collateral i.e. Ether &
How do they handle bad loans or non-repayment automatically?
We shall talk over with scenarios, where one of the below can happen
1-If the loaner does not pay back the loan on time and the interest reaches a certain threshold limit, the underlying debt collateral is liquidated to buy DAI from the open market and is destroyed again to maintain the price of the tokens.
2- If the price of the collateral dips below the min 150 % the system will liquidate the appropriate Ether holdings automatically with the 30% penalty fee on top of the interest owed.
Is MKR token, a good investment?MakerDAO is a completely decentralized autonomous organization that infers that it is run by a huge crowd. Anybody who owns the MKR governance token automatically become part of the community. Holders of the MKR tokens can vote to decide how the org is run. How much the interest rate should be, new features etc., As more and more DAI tokens are taken and paid back, more interest is paid and more MKR tokens are destroyed. Thus increasing the scarcity of the token and maintaining the price high. In the last 2 months, the price of the MKR token has raised 3X from 530USD in Dec 2020 to 1200USD in Jan 2021. Maker DAO is a perfect example of DeFi (Decentralized Finance) in action that is foreseen to be a big challenge to the traditional lending systems provided by banks. It is more lucrative for the borrower as well, simply because you lend a loan to yourself by locking up your Ether as collateral and creating a CDP (Collateralized Debt Position).
On the flip side, the system has its own set of risks as well, though everything seems to be so exemplary, it is not a time tested model yet. Anything erroneous can happen, for if there is a crash in the price of cryptocurrency the underlying collateral in the system can go worthless. If more bad loans and non-repayment happens the price of MKR token can go down subsidizing it. As always kindly do your research before any investment in any crypto.