MakerDAO is the protocol behind DAI, a decentralized stablecoin maintained at $1 through overcollateralized crypto vaults and algorithmic interest rates. You deposit ETH or other approved assets, borrow DAI against them (at 150%+ collateralization), and pay a stability fee (interest). Governance is handled by MKR token holders who set risk parameters, approve collateral types, and manage the $5B+ DAI supply.
What Is MakerDAO (And How DAI Works)?
4 min read
The short version
MakerDAO is a robot lending desk. You walk in with $15,000 worth of ETH and ask to borrow $10,000 in DAI (dollar stablecoins). The robot says yes because your collateral exceeds your loan. If your ETH drops in value and approaches $10,000, the robot sells your ETH to cover the loan before it goes bad. No humans involved. No credit check. Just math.
How It Works
How the system works: Vaults (formerly CDPs): you open a vault on oasis.app (or via DeFi integrations), deposit collateral (ETH, WBTC, stETH, or other approved tokens), and mint DAI up to your maximum LTV. Each collateral type has different parameters: ETH: 150% minimum collateralization (deposit $150 ETH, mint up to $100 DAI). WBTC: 145% minimum. stETH: 150%. Real-world assets: variable. Stability Fee: the interest rate you pay on borrowed DAI. Set by MKR governance. Currently varies by vault type: ETH-A ~5%, ETH-B ~5.5%, stETH ~5%. This fee accrues continuously and must be repaid when you close the vault. DAI Savings Rate (DSR): interest paid to anyone who deposits DAI into the DSR contract. Currently ~5-8% (set by governance, funded by stability fees and RWA income). This is the primary mechanism incentivizing people to hold DAI. Liquidation: if your vault collateralization drops below the minimum (ETH price falls too far), liquidation bots auction your collateral to repay the DAI debt + 13% penalty. You keep the DAI you borrowed but lose most of your collateral. Peg stability: if DAI > $1, governance lowers stability fees (cheaper to mint DAI, increasing supply). If DAI < $1, governance raises fees (more expensive to hold DAI debt, reducing supply). The DSR also adjusts to incentivize or disincentivize holding. MKR governance: MKR token holders vote on all parameters: collateral types, stability fees, DSR, liquidation ratios, debt ceilings, and oracle providers. MKR is also the backstop: in extreme undercollateralization events, new MKR is minted and sold to cover bad debt (diluting MKR holders as last-resort insurance).
Opening a vault and earning on DAI
You have 5 ETH ($15,000 at $3,000) and want stable yield. Step 1: Go to oasis.app, connect wallet, open an ETH-A vault. Step 2: Deposit 5 ETH. Maximum DAI mintable: $10,000 (at 150% ratio). You conservatively mint 6,000 DAI (250% collateralization, very safe). Step 3: Deposit 6,000 DAI into the DSR (one transaction). Now earning ~6% on your DAI ($360/year). Step 4: Your vault charges ~5% stability fee on 6,000 DAI = $300/year in interest owed. Net position: earning $360 DSR - $300 stability fee = $60/year net income, PLUS you retain full ETH price exposure (if ETH goes to $5,000, your 5 ETH is worth $25,000 and you still owe only 6,000 DAI). Liquidation price: ETH at $1,800 (vault hits 150% ratio). Current ETH: $3,000. You have 40% downside buffer before liquidation risk. If concerned: repay some DAI or deposit more ETH to lower your liquidation price further.
What People Get Wrong
DAI is backed by dollars like USDC
DAI is primarily backed by crypto collateral locked in smart contracts (ETH, WBTC, stETH) plus real-world assets (US Treasuries via RWA vaults). No company holds dollars for DAI. The peg is maintained through overcollateralization and governance-controlled interest rates, not by dollar reserves in a bank.
MakerDAO cannot be censored
The protocol smart contracts are decentralized, but MakerDAO governance has integrated USDC as collateral and real-world assets that involve regulated entities. These touchpoints introduce some censorship surface. Pure crypto-only vaults (ETH-A, WBTC-A) remain censorship-resistant. The protocol is a hybrid of decentralized and traditional elements.
The DSR is free money
DSR yield is funded by vault stability fees (borrowers pay interest that funds depositor yield) and income from real-world asset collateral (Treasuries earning interest). It is real yield from productive activity, not printed tokens. But it can be reduced by governance at any time if revenue does not support the rate.
Keep Reading
Sources & Further Reading
- MakerDAO Docs
Official documentation covering vaults, DSR, governance, and risk parameters
- Oasis.app
Official MakerDAO vault management interface
- DAI Stats
Live dashboard showing DAI supply, collateralization ratios, and system health
Questions People Also Ask
- What is the minimum to open a vault?
- Technically no protocol minimum, but there is a dust limit (minimum DAI debt per vault, currently 15,000 DAI for most vault types). For smaller amounts, buy DAI on a DEX and deposit into the DSR (no vault needed, no minimum). The vault mechanism is designed for larger collateral positions.
- What happens to my ETH if I get liquidated?
- Your ETH is auctioned to repay your DAI debt plus a 13% liquidation penalty. You keep the DAI you borrowed. Example: 5 ETH collateral ($9,000 at liquidation), 6,000 DAI debt. Auction recovers 6,000 DAI + 780 DAI penalty from your ETH. Remaining ETH (approximately 0.5 ETH, worth ~$900) is returned to you. You lost most of your collateral but still have 6,000 DAI.
- Is DAI safe to hold long-term?
- DAI has maintained its peg remarkably well since 2017 through multiple market crashes. Collateralization is transparent and verifiable on-chain (daistats.com). The primary risks: smart contract bugs (low probability given 7+ years of operation), governance decisions that weaken the system, and extreme market crashes that overwhelm liquidation mechanisms. For stablecoin diversification, holding some DAI alongside USDC reduces single-issuer risk.