Before we talk about how MakerDAO improves community governance, it is important to understand how the Maker network works.
MakerDAO uses two native cryptocurrencies: Maker (MKR), a volatile currency that represents governance power and ownership shares, and DAI, a stablecoin pegged to the US dollar.
The DAI stablecoin is fully blockchain based, living within smart contracts on the Ethereum blockchain. Within the Ethereum blockchain, MakerDAO works to minimise the volatility of DAI against the US dollar. DAI promises to play an important role in the crypto economy by eliminating the negative consequences of volatile cryptocurrency prices.
Because stablecoins eliminate this volatility, they are able to avoid price disasters, such as Bitcoin plummeting from $20,000 to $3,300 over the course of 2018.
Stablecoins such as DAI are becoming a popular choice for investors as they reduce the volatility that often causes other currencies to plunge into bear markets, resulting in huge losses for investors. However, it is yet to be seen whether stablecoins will take a larger market share than original cryptocurrencies such as Bitcoin.
MakerDAO’s stabilisation fees
MakerDAO charges users every time they return their borrowed DAI in return for their deposited collateral. This fee involves the burning of MKR tokens in order to reduce supply and increase their value in the long run.
This means that the stability fee is the total value of MKR tokens that are burned each time a borrower returns their DAI. However, there is a penalty fee, and that is the portion of DAI returned during the closing of a CDP (Collateralised Debt Position). A CDP is used to generate the DAI stablecoin against the current collateral ETH.
Borrowers only pay the stability fee with Maker tokens when they close a CDP position and the penalty fee is paid.
Decentralised governance models
In traditional terms, community governance is where the community of an organisation is involved in the participation, engagement, and decision-making of public matters.
MakerDAO uses a decentralised governance model. Decentralised governance models are where the community participates in the decision-making process. This is achieved by either developing dApps (decentralised applications), building upon the business (sales, PR, marketing, and so on), sharing content, or by trading an asset.
Decentralised governance models like MakerDAO allow the supply of coins to be controlled by the market (users) and transactions. The MKR token plays an important role in the governance of the Maker platform.
Governance is completed at the system level through the election of an Active Proposal by MKR voters. This Active Proposal describes the smart contract that is empowered by MKR voting. This is done to gain administrative access to modify the internal governance variables used by the Maker platform.
Any Ethereum account is able to deploy valid proposal smart contracts. MKR voters can use their Maker tokens to cast approval votes for each proposal that they want to elect as the Active Proposal. The smart contract with the highest number of approval votes will then be elected as the Active Proposal.
Benefits of a decentralised governance model
The Maker Governance Process establishes a rough consensus in the governance community, and this is done before any votes are cast. This means the outcome of the voting should already be known, and the voting process is not when the decision-making happens. Instead, it is a way to securely implement decisions that have already been processed into the system.
Having this system in place allows users to take part and have a role in decisions that are being made about their network. This gives users a sense of ownership and knowledge that they are continuing to improve an organisation they love.
MakerDAO (MKR) token holders recently voted to decide whether they should increase DAI stability fees from 3.5% all the way up to 7.5% following three previous rate hikes for the stablecoin protocol in 2019.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.