MakerDAO is one of the oldest and most consequential DeFi protocols. Founded in 2014 by Rune Christensen and launched on Ethereum in 2017, MakerDAO created DAI — a decentralized, collateral-backed stablecoin pegged to the US dollar. DAI was the original “algorithmic” stablecoin, though properly it is an over-collateralized CDP (Collateralized Debt Position) stablecoin rather than the algorithmic variety that collapsed alongside Terra/Luna in 2022. As of 2024–2025, MakerDAO is undergoing its most radical transformation: the “Endgame” plan that involves SubDAOs, rebranding, a new chain, and a lending frontend that has grown to $2B+ TVL.
How MakerDAO Works: The Core Mechanism
Here’s how this works in practice.
DAI Creation via Collateralized Debt Positions (CDPs)
DAI is created when users deposit collateral into Maker “Vaults” (originally called CDPs):
- Deposit collateral: User locks ETH (or WBTC, stETH, USDC, RWA tokens, etc.) into a Maker Vault smart contract
- Mint DAI: User borrows DAI against the collateral at a defined collateralization ratio
- Minimum collateral ratios:
ETH Vault: ~150% (deposit $1,500 ETH to borrow $1,000 DAI)
Wrapped stETH: ~170%
WBTC: ~150%
USDC: ~101% (near dollar parity — these are used for DAI/USDC peg stability) - Stability fee: Borrowers pay an annual stability fee (accrues in DAI). This is essentially the interest rate on DAI debt.
- Liquidation: If collateral value falls below the liquidation ratio (typically 150%), the Vault is auctioned
Where new DAI comes from: All DAI in existence is backed by collateral in Maker Vaults. The total DAI supply equals the total DAI debt across all vaults. If a user repays their 1,000 DAI + stability fees and withdraws their ETH, that 1,000 DAI is burned.
The DAI Peg Stabilization Mechanism
Above $1 peg: If DAI trades above $1, opening new Vaults to borrow DAI becomes more profitable (borrow at par, sell above par). New DAI minting increases supply, pushing price toward $1.
Below $1 peg: Buying DAI below $1 to repay Vault debt at discount is profitable. Demand for DAI increases, price rises toward $1. The DSR (Dai Savings Rate) is also increased to attract holders by offering yield.
Peg Stability Module (PSM): Maker introduced the PSM — a special Vault where 1 USDC can always be exchanged for exactly 1 DAI (and vice versa), with minimal fees. The PSM provides hard peg support because DAI arbitrageurs can always mint or redeem against USDC at par. The tradeoff: USDC centralization exposure. Maker later diversified the collateral backing toward RWAs.
The MKR Token and Governance
MKR serves two functions:
- Governance token: MKR holders vote on every protocol parameter:
Which collateral types to accept and at what ratios
Stability fee rates for each collateral
The Dai Savings Rate (DSR) — yield paid to DAI depositors
Protocol upgrades, emergency shutdown authority
- Backstop mechanism: If a liquidated Vault’s auction proceeds are insufficient to cover the DAI debt plus a penalty, MakerDAO’s protocol can create new MKR tokens to backstop the shortfall. This means MKR holders bear the ultimate risk for undercollateralized positions — an economic alignment mechanism.
MKR buybacks: When the protocol generates surplus stability fees (stability fee revenue > DSR payout + operating costs), the surplus is used to market-buy MKR tokens, which are then burned. This deflationary mechanism ties MKR value to the revenue the protocol generates.
Real-World Assets (RWA): The Trillion-Dollar Pivot
Starting in 2021, Maker introduced RWA (Real-World Asset) collateral — tokenized versions of real-world financial assets deposited as collateral to mint DAI:
Major RWA allocations (2023–2024):
| Counterparty | Asset Type | DAI Minted | Structure |
|---|---|---|---|
| Monetalis Clydesdale | Short US Treasuries | ~$1.25B | SPV trusts managed by Monetalis |
| BlockTower Andromeda | US Treasuries | ~$1.2B | Cayman Islands trust structure |
| MIP65 (direct) | US T-bills | ~$500M | Direct on-chain structured notes |
| Centrifuge pools | Trade finance receivables | ~$200M | Centrifuge tokenization infrastructure |
Why Maker moved to RWAs:
- Post-zero interest rates era: When interest rates were near 0%, crypto-native yield was higher. When the Fed raised rates to 5%+, short-term US Treasury yield (5%+ risk-free) made RWA collateral generate substantial protocol revenue.
- Maker earns the yield on the RWAs (Treasury interest) and distributes most via the DSR.
- As of 2023–2024, RWAs represented ~60%+ of Maker’s protocol revenue
The tradeoff: RWAs introduce traditional finance counterparty and legal risks (trusts, custodians, banks) that pure crypto collateral does not. Maker governance must weigh yield against centralization risk.
Spark Protocol
Spark Protocol is MakerDAO’s native lending frontend, similar in interface to Aave but deeply integrated with Maker’s DSR:
Architecture: Spark is built on Aave V3 code (a fork with permission from governance). It’s primarily used for:
- Borrowing DAI (SparkLend’s main purpose)
- Depositing to earn sDAI (savings layer)
sDAI (Savings DAI):
- ERC-4626 tokenized vault standard
- Depositing DAI into the DSR contract mints sDAI
- sDAI automatically accrues the DSR yield
- sDAI balance increases in value vs. DAI (1 sDAI appreciates toward more DAI over time)
- The DSR has been as high as 8% in 2023–2024 (when Maker was distributing its RWA yield)
- Composable: sDAI can be used as collateral in other DeFi protocols, bridged to L2s, integrated into wallets
SparkLend: The lending frontend where users can:
- Borrow DAI against ETH, stETH, WBTC collateral at competitive rates
- Deposit sDAI to earn DSR
- Borrow ETH/stETH (powered by Aave V3 codebase)
Spark on L2s: Spark has expanded to Base, Gnosis Chain, and other L2s, allowing users to earn sDAI yield on those chains without bridging to Ethereum mainnet.
The Endgame Plan
In 2022–2023, Maker founder Rune Christensen published the “Endgame” governance architecture overhaul — the most ambitious restructuring in DeFi history:
Core Endgame Changes
1. NewChain Migration:
Maker plans to eventually migrate to a new dedicated blockchain (“NewChain”) using a version of Solana’s technology stack with Ethereum bridge. This would allow Maker to fully control its execution environment. Timeline: long-term (not immediately imminent as of 2024).
2. SubDAOs:
Rather than governing everything through a single DAO, Endgame introduces SubDAOs — semi-autonomous entities that focus on specific activities:
- SparkDAO: Governs the Spark Protocol lending frontend
- Multiple “MetaDAOs”: Focus areas in DeFi, RWA integration, and other verticals
- SubDAOs earn “SubDAO tokens” — their own governance tokens
- Maker distributes newly minted SubDAO tokens to MKR holders and DAI depositors as yield boosters
3. Rebranding: MakerDAO → Sky
- Maker rebranded its primary product to “Sky” in 2024
- DAI → USDS: The Maker-native stablecoin is being rebranded to USDS (but DAI still exists and the two are interchangeable 1:1)
- MKR → SKY: MKR token can be converted to SKY at a rate of 1 MKR → 24,000 SKY (MKR still exists and trades separately)
- SKY accrues additional USDS yield from protocol revenue plus new SubDAO token farming
The controversy: The rebranding has been controversial. USDS includes a “freeze feature” for regulatory compliance — meaning the Sky/Maker team can blacklist USDS addresses, unlike DAI which has no such feature. Many DeFi purists see this as incompatible with decentralization values.
4. Governance Minimization:
Long-term plan: reduce the surface area of required governance votes by hardcoding more parameters, aiming for a “self-sufficient” protocol that does not require constant active governance.
MakerDAO’s Competitive Position
Against USDC/USDT: DAI/USDS retains composability advantages — it can be generated permissionlessly against crypto collateral without a central issuer like Circle or Tether.
Against Frax/LUSD: Maker is significantly larger (DAI supply $4–5B+) and has multi-collateral flexibility that single-collateral issuers cannot match.
Against Ethena (USDe): Ethena’s delta-neutral stablecoin generates yield through funding rate capture; Maker’s sDAI generates yield through RWA treasury allocation. Both compete for the “yield-bearing stablecoin” market.
How to Access Spark / sDAI
Earn sDAI: Visit spark.fi → connect wallet → deposit DAI to receive sDAI at the DSR yield.
Bridge sDAI to L2s: Spark’s L2 deployment makes sDAI accessible on multiple chains without requiring Ethereum mainnet gas costs.
Hold DAI or USDS: — DAI is available on most major exchanges.
Secure holdings: For significant DeFi positions, hardware wallet is recommended.
Related Terms
Sources
Klages-Mundt, A., Harz, D., Gudgeon, L., Liu, J.P., & Minca, A. (2020). Stablecoins 2.0: Economic Foundations and Risk-Based Models. Proceedings of the 2nd ACM Conference on Advances in Financial Technologies, pp. 59–79.
Gudgeon, L., Perez, D., Harz, D., Livshits, B., & Gervais, A. (2020). The Decentralized Financial Crisis: Attacking DeFi. Proceedings of the IEEE Security and Privacy Workshops.
Catalini, C., & Gans, J.S. (2016). Some Simple Economics of the Blockchain. NBER Working Paper 22952.
Leshner, R., & Hayes, G. (2019). Compound: The Money Market Protocol. Compound whitepaper.
Rune Christensen. (2022). The Endgame Plan. MakerDAO Forum (forum.makerdao.com), MIP101.