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    Maker Protocol
    Maker Protocol

    A permissionless autonomous system of smart contracts that enables users to generate the stablecoin, Dai.

    The Maker Protocol allows users to self-generate Dai against collateral deposited into smart contract-based escrow. Current elements of the Maker Protocol are the Dai stablecoin, Maker Collateral Vaults, Oracles, and Voting.
    At the core is the collateral portfolio, a pool of on-chain digital assets that back the Dai supply. Track the collateral backing Dai.
    While the collateral presents a source of value, additional heuristics are required to maintain a soft peg of \$1.

    Governance

    Arbitrage

    In particular, the Maker Protocol incentivizes arbitrageurs to buy and sell Dai in the open marketplace.
    This arbitrage is supported by monetary policy adjustments that influence the supply and demand for Dai recursively until Dai has returned to its target price.
    Market makers have come to rely on these Stability Fee changes, and as a result, supply the necessary liquidity to minimize outsized deviations.

    Emergency Shutdown

    In extreme events, 1 Dai can be redeemed for \$1 worth of collateral through a process known as Emergency Shutdown.
    However, collateral values can sometimes fluctuate dramatically. If collaterals were to suffer a sharp decline in value, the settlement feature enabled by Emergency Shutdown may not allow for full redemption.
    As a last line of defense against volatile asset prices, Debt Auctions, a process for auctioning MKR tokens, serves as a backstop for undercollateralized Dai.

    MKR Token Holders

    MKR token holders are ultimately the group motivated to ensure the successful operation of the Maker Protocol.
    MKR token holders coordinate using a decentralized governance process through which they evaluate and select appropriate collateral assets.
    The success of this endeavor is strongly correlated to a proficient risk evaluation of the collateral set.
    A failure in due diligence or coordination will result in severe losses for both end-users of the Maker Protocol (in the form of declining Dai price) and MKR token holders (in the form of MKR dilution).
    While the incentives for MKR token holders are clear, executing the plan requires additional work.

    Decentralized Risk Function

    There is considerable overhead with respect to quantifying risk in the Maker Protocol and managing it appropriately.
    It is not practical (nor necessarily advisable) for MKR token holders to directly analyze it themselves.
    A simple and intuitive solution is to outsource risk specialists who are tasked with evaluations of the risks.
    While the traditional model of a centralized risk function could operate as a bootstrapping mechanism, we also propose a more robust and decentralized blueprint.
    The primary idea is to create the Decentralized Risk Function, a process by which distributed teams of independent risk specialists are incentivized to exercise due diligence on the collateral portfolio and create models for appropriate monetary policy.
    The decentralized model affords us a near limitless talent pool, blanket coverage, and uninterrupted operation.

    Risk Teams

    Decentralized risk teams are designed to be resistant to capture from biased ecosystem actors; risk teams operate solely for the benefit of MKR token holders.
    Through the governance process, the MKR token holders are responsible for managing the operational aspects of Maker risk teams.