The Maker Protocol:
MakerDAO’s Multi-Collateral Dai(MCD) System
Abstract
The Maker Protocol, also known as the Multi-Collateral Dai (MCD) system,
allows users to generate Dai by leveraging collateral assets approved by“Maker Governance.” Maker Governance is the community organized andoperated process of managing the various aspects of the Maker Protocol. Dai
is a decentralized, unbiased, collateral-backed cryptocurrency​ ​soft-pegged to
the US Dollar. Resistant to hyperinflation due to its low volatility, Dai offers
economic freedom and opportunity to anyone, anywhere.
This white paper is a reader-friendly description of the Protocol, which is built
on the Ethereum blockchain. Technically savvy users might want to headdirectly to ​Introduction to the Maker Protocol​ in the Maker Documentation
Portal for an in-depth explanation of the entire system.

About MakerDAO
MakerDAO is an open-source project on the Ethereum blockchain and a
Decentralized Autonomous Organization1 created in 2014. The project ismanaged by people around the world who hold its governance token, MKR.
1

Note that Decentralized Autonomous Organizations, or DAOs, are understood in the Ethereumcommunity as largely social and technical communities centered around a particular mission or
project, and does not necessarily imply the existence of traditional corporate forms.

Through a system of ​scientific governance​ involving Executive Voting andGovernance Polling, MKR holders manage the Maker Protocol and thefinancial risks of Dai to ensure its stability, transparency, and efficiency. MKR
voting weight is proportional to the amount of MKR a voter stakes in thevoting contract, DSChief. In other words, the more MKR tokens locked in thecontract, the greater the voter’s decision-making power.

About the Maker Protocol
The Maker Protocol, built on the Ethereum blockchain,2 enables users tocreate currency. Current elements of the Maker Protocol are the Dai
stablecoin, Maker Collateral Vaults, Oracles, and Voting. MakerDAO governs
the Maker Protocol by deciding on key parameters (e.g., stability fees,
collateral types/rates, etc.) through the voting power of MKR holders.
The Maker Protocol, one of the largest decentralized applications (dapps) on
the Ethereum blockchain, was the first decentralized finance (DeFi)
application to earn significant adoption.

About the Maker Foundation
The ​Maker Foundation​, which is part of the global Maker community, built
and launched the Maker Protocol in conjunction with a number of outside
partners. It is currently working with the MakerDAO community to bootstrap
decentralized governance of the project and drive it toward complete
decentralization.

About the Dai Foundation
The Dai Foundation, based in Denmark, is self-governing and independent of
the Maker Foundation. It was formed to house the Maker community's key
intangible assets, such as trademarks and code copyrights, and it operates
solely on the basis of objective and rigid statutes that define its mandate. Its
purpose, as noted in the ​Dai Foundation Trust Deed​, is to safeguard whatcannot be technologically decentralized in the Maker Protocol.

2​https://ethereum.org/

Introduction
Beginning in 2015, the MakerDAO project operated with developers aroundthe globe working together on the first iterations of code, architecture, anddocumentation. In December 2017, the first MakerDAO formal white paper
was published, introducing the original Dai (now Sai) Stablecoin System.
The white paper described how anyone could generate Dai using that system
by leveraging Ethereum (ETH) as collateral through unique smart contracts
known as Collateralized Debt Positions (CDPs). Given that ETH was the only
collateral asset accepted by the system, the Dai generated was called
Single-Collateral Dai (SCD), or Sai. That white paper also included a plan to
upgrade the system to support multiple collateral asset types in addition to
ETH. What was then an intention, became a reality in November 2019.
The Dai Stablecoin System, today called the Maker Protocol, now accepts as
collateral any Ethereum-based asset that has been approved by MKR
holders, who also vote on corresponding Risk Parameters for each collateral
asset. Voting is a critical component of the Maker decentralized governanceprocess.
Welcome to ​Multi-Collateral Dai (MCD)​.

In MCD We Trust
Blockchain technology provides an unprecedented opportunity to ease thepublic’s growing frustration with—and distrust of—dysfunctional centralized
financial systems. By distributing data across a network of computers, thetechnology allows any group of individuals to embrace transparency rather
than central-entity control. The result is an unbiased, transparent, and highly
efficient permissionless system—one that can improve current global
financial and monetary structures and better serve the public good.

Bitcoin was created with this goal in mind. But, while Bitcoin succeeds as a
cryptocurrency on a number of levels, it is not ideal as a medium of exchange
because its fixed supply and speculative nature results in volatility, which
prevents it from proliferating as mainstream money.
The Dai stablecoin, on the other hand, succeeds where Bitcoin fails precisely
because Dai is designed to ​minimize price​ ​volatility.​ A decentralized,
unbiased, collateral-backed cryptocurrency that is​ ​soft-pegged to the US
Dollar, Dai’s value is in its stability.
Since the release of Single-Collateral Dai in 2017, ​user adoption of thestablecoin has risen dramatically​, and​ it has become a building block fordecentralized applications that help expand the DeFi (decentralized finance)
movement. ​Dai’s success is part of a wider industry movement for
stablecoins, which are cryptocurrencies designed to maintain price value andfunction like money.
For example, in February 2019, JPMorgan became the first bank in the
United States to create and test a digital coin that represents 1 USD.3 As thecryptocurrency industry grows, other banks, financial services companies,
and even governments will create stable digital currencies (e.g., Central Bank
Digital Currencies), as will large organizations outside of the finance sector.
Facebook, for example, announced its plans for Libra, “a stable digital
cryptocurrency that will be fully backed by a reserve of real assets,”4 in June
2019. However, such proposals forfeit the core value proposition ofblockchain technology: global adoption of a common infrastructure without acentral authority or administrator that may abuse its influence.

An Overview of the Maker Protocol and Its
Features
The Maker Protocol
The Maker Protocol is one of the largest dapps on the Ethereum blockchain.
Designed by a disparate group of contributors, including developers within
34​https://www.jpmorgan.com/global/news/digital-coin-payments​https://libra.org/en-US/wp-content/uploads/sites/23/2019/06/LibraWhitePaper_en_US.pdf

the Maker Foundation, its outside partners, and other persons and entities, itis the first decentralized finance (DeFi) application to see significant adoption.
The Maker Protocol is managed by people around the world who hold its
governance token, MKR. Through a system of ​scientific governanceinvolvingExecutive Voting and Governance Polling, MKR holders govern the
Protocol and the financial risks of Dai to ensure its stability, transparency,
and efficiency. One MKR token locked in a voting contract equals one vote.

The Dai Stablecoin
The Dai stablecoin is a decentralized, unbiased, collateral-backed
cryptocurrency​ ​soft-pegged to the US Dollar. Dai is held in cryptocurrency
wallets or within platforms, and is supported on Ethereum and other popular
blockchains.
Dai is easy to generate, access, and use. Users generate Dai by depositing
collateral assets into Maker Vaults within the Maker Protocol. This is how Dai
is entered into circulation and how users gain access to liquidity. Others
obtain Dai by buying it from brokers or exchanges, or simply by receiving it
as a means of payment.
Once generated, bought, or received, Dai can be used in the same manner as
any other cryptocurrency: it can be sent to others, used as payments forgoods and services, and even held as savings through a feature of the Maker
Protocol called the ​Dai Savings Rate​ (DSR).
Every Dai in circulation is directly backed by excess collateral, meaning thatthe value of the collateral is higher than the value of the Dai debt, and all Dai
transactions are publicly viewable on the Ethereum blockchain.

What Properties of Dai Function Similarly to Money?
Generally, money has four functions:
1. A store of value
2. A medium of exchange3. A unit of account
4. A standard of deferred payment
Dai has properties and use cases designed to serve these functions.
Dai as a Store of Value

A store of value is an asset that keeps its value without significant
depreciation over time. Because Dai is a stablecoin, it is designed to function
as a store of value even in a volatile market.
Dai as a Medium of Exchange

A medium of exchange is anything that represents a standard of value and isused to facilitate the sale, purchase, or exchange (trade) of goods or services.
The Dai stablecoin is used around the world for all types of transactional
purposes.
Dai as a Unit of Account

A unit of account is a standardized measurement of value used to pricegoods and services (e.g., USD, EUR, YEN). Currently, Dai has a target priceof 1USD (1 Dai = 1 USD). While Dai is not used as a standard measurementof value in the off-chain world, it functions as a unit of account within the
Maker Protocol and some blockchain dapps, whereby Maker Protocol
accounting or pricing of dapp services is in Dai rather than a fiat currency like
USD.
Dai as a Standard of Deferred Payment

Dai is used to settle debts within the Maker Protocol (e.g., users use Dai to
pay the stability fee and close their Vaults). This benefit separates Dai fromother stablecoins.

Collateral Assets
Dai is generated, backed, and kept stable through collateral assets that are
deposited into Maker Vaults on the Maker Protocol. A collateral asset is adigital asset that MKR holders have voted to accept into the Protocol.
To generate Dai, the Maker Protocol accepts as collateral any
Ethereum-based asset that has been approved by MKR holders. MKR

holders also must also approve specific, corresponding Risk Parameters foreach accepted collateral (e.g., more stable assets might get more lenient Risk
Parameters, while more risky assets could get stricter Risk Parameters).
Detailed information on Risk Parameters is below. These and other decisionsof MKR holders are made through the Maker decentralized governanceprocess.

Maker Vaults
All accepted collateral assets can be leveraged to generate Dai in the Maker
Protocol through smart contracts called Maker Vaults. Users can access theMaker Protocol and create Vaults through a number of different userinterfaces (i.e., network access portals), including ​Oasis Borrow​ and ​various
interfaces built by the community​. Creating a Vault is not complicated, but
generating Dai does create an obligation to repay the Dai, along with a
Stability Fee, in order to withdraw the collateral leveraged and locked inside a
Vault.
Vaults are inherently non-custodial: Users interact with Vaults and the Maker
Protocol directly, and each user has complete and independent control overtheir deposited collateral as long the value of that collateral doesn’t fall below
the required minimum level (the Liquidation Ratio, discussed in detail below).

Interacting with a Maker Vault● Step​ ​1:​ Create and ​Collateralize a Vault
A user creates a Vault via the Oasis Borrow portal or acommunity-created interface, such as Instadapp, Zerion, or
MyEtherWallet, by funding it with a specific type and amount ofcollateral that will be used to generate Dai. Once funded, a Vault is
considered collateralized.
● Step​ ​2:​ ​Generate Dai​ ​from​ ​the​ ​Collateralized​ ​Vault
The Vault owner initiates a transaction, and then confirms it in her
unhosted cryptocurrency wallet in order to generate a specific amountof Dai in exchange for keeping her collateral locked in the Vault.
● Step​ ​3:​ ​Pay Down​ ​the​ ​Debt​ ​and​ the Stability​ ​Fee
To retrieve a portion or all of the collateral, a Vault owner must pay
down or completely pay back the Dai she generated, plus the Stability

Fee that continuously accrues on the Dai outstanding. The Stability Fee
can only be paid in Dai.
● Step​ ​4:​ ​Withdraw Collateral​
With the Dai returned and the Stability Fee paid, the Vault owner can
withdraw all or some of her collateral back to her wallet. Once all Dai iscompletely returned and all collateral is retrieved, the Vault remains
empty until the owner chooses to make another deposit.
Importantly, each collateral asset deposited requires its own Vault. So, someusers will own multiple Vaults with different types of collateral and levels of
collateralization.

Liquidation of Risky Maker Vaults
To ensure there is always enough collateral in the Maker Protocol to cover
the value of all outstanding debt (the amount of Dai outstanding valued at theTarget Price), any Maker Vault deemed too risky (according to parameters
established by Maker Governance) is liquidated through automated Maker
Protocol auctions. The Protocol makes the determination after comparing the
Liquidation Ratio to the current collateral-to-debt ratio of a Vault. Each Vault
type has its own Liquidation Ratio, and each ratio is determined by MKR
voters based on the risk profile of the particular collateral asset type.

Maker Protocol Auctions
The ​auction mechanisms​ of the Maker Protocol enable the system toliquidate Vaults even when price information for the collateral is unavailable.
At the point of liquidation, the Maker Protocol takes the liquidated Vault
collateral and subsequently sells it using an internal market-based auction
mechanism. This is a​ Collateral Auction​.
The Dai received from the Collateral Auction is used to cover the Vault’s
outstanding obligations, including payment of the Liquidation Penalty​ ​fee set
by MKR voters for that specific Vault collateral type.
If enough Dai is bid in the Collateral Auction to fully cover the Vault
obligations plus the Liquidation Penalty, that auction converts to a ​Reverse
Collateral Auction​ in an attempt to sell as little collateral as possible. Any
leftover collateral is returned to the original Vault owner.

If the Collateral Auction does not raise enough Dai to cover the Vault’s
outstanding obligation, the deficit is converted into Protocol debt. Protocol
debt is covered by the Dai in the Maker Buffer. If there is not enough Dai inthe Buffer, the Protocol triggers a​ Debt Auction​. During a Debt Auction, MKR
is minted by the system (increasing the amount of MKR in circulation), andthen sold to bidders for Dai.
Dai proceeds from the Collateral Auction go into the Maker Buffer, which
serves as a buffer against an increase of MKR overall supply that could result
from future uncovered Collateral Auctions and the accrual of the Dai Savings
Rate (discussed in detail below).
If Dai proceeds from auctions and Stability Fee payments exceed the Maker
Buffer limit (a number set by Maker Governance), they are sold through a
Surplus Auction​. During a Surplus Auction, bidders compete by bidding
decreasing amounts of MKR to receive a fixed amount of Dai. Once theSurplus Auction has ended, the Maker Protocol autonomously destroys the
MKR collected, thereby reducing the total MKR supply.

Example (Collateral Auction Process):
A large Vault becomes undercollateralized due to market conditions. An
Auction Keeper then detects the undercollateralized Vault opportunity andinitiates liquidation of the Vault, which kicks off a Collateral Auction for, say,
50 ETH.
Each ​Auction Keeper​ has a ​bidding model​ to assist in winning auctions. A
bidding model includes a price at which to bid for the collateral (ETH, in thisexample). The Auction Keeper uses the token price from its bidding model as
the basis for its bids in the first phase of a Collateral Auction, where
increasing Dai bids are placed for the set amount of collateral. This amountrepresents the price of the total Dai wanted from the collateral auction.
Now, let's say the Auction Keeper bids 5,000 Dai for the 50 ETH to meet thisamount. The Dai bid is ​transferred from the Vault Engine to the Collateral
Auction contract​. With enough Dai in the Collateral Auction contract to cover
the system's debt plus the Liquidation Penalty, the first phase of the
Collateral Auction is over.

In order to reach the price defined in its bidding model, the Auction Keeper
submits a bid in the second phase of the Collateral Auction. In this phase, theobjective is to return as much of the collateral to the Vault owner as themarket will allow. The bids that the Auction Keepers place are for fixed Dai
amounts and decreasing amounts of ETH. For instance, the bidding model ofthe Keeper in this example seeks a bid price of 125 Dai per ETH, so it offers
5000 Dai for 40 ETH. Additional Dai for this bid is ​transferred from the Vault
Engine to the Collateral Auction contract​. After the bid duration limit isreached and the bid expires, the Auction Keeper claims the winning bid andsettles the completed Collateral Auction by collecting the won collateral.

Key External Actors
In addition to its smart contract infrastructure, the Maker Protocol involvesgroups of external actors to maintain operations: Keepers, Oracles, andGlobal Settlers (Emergency Oracles), and Maker community members.
Keepers take advantage of the economic incentives presented by theProtocol; Oracles and Global Settlers are external actors with special
permissions in the system assigned to them by MKR voters; and Maker
community members are individuals and organizations that provide services.

Keepers
A Keeper is an independent (usually automated) actor that is incentivized byarbitrage opportunities to provide liquidity in various aspects of adecentralized system. In the Maker Protocol, ​Keepers are market participantsthat help Dai maintain its Target Price​ ($1): they sell Dai when the market
price is above the Target Price, and buy Dai when the market price is below
the Target Price. Keepers participate in Surplus Auctions, Debt Auctions, andCollateral Auctions when Maker Vaults are liquidated.

Price Oracles
The Maker Protocol requires real-time information about the market price ofthe collateral assets in Maker Vaults in order to know when to trigger
Liquidations.

The Protocol derives its internal collateral prices from a ​decentralized Oracle
infrastructure​ that consists of a broad set of individual nodes called Oracle
Feeds. MKR voters choose a set of trusted Feeds to deliver price information
to the system through Ethereum transactions. They also control how many
Feeds are in the set.
To protect the system from an attacker attempting to gain control of amajority of the Oracles, the Maker Protocol receives price inputs through the
Oracle Security Module​ (OSM), not from the Oracles directly. The OSM,
which is a layer of defense between the Oracles and the Protocol, delays aprice for one hour, allowing Emergency Oracles or a Maker Governance voteto freeze an Oracle if it is compromised. Decisions regarding Emergency
Oracles and the price delay duration are made by MKR holders.

Emergency Oracles
Emergency Oracles are selected by MKR voters and act as a last line ofdefense against an attack on the governance process or on other Oracles.
Emergency Oracles are able to freeze individual Oracles (e.g., ETH and BAT
Oracles) to mitigate the risk of a large number of customers trying towithdraw their assets from the Maker Protocol in a short period of time, as
they have the authority to unilaterally trigger an Emergency Shutdown.

DAO Teams
DAO teams consist of individuals and service providers, who may becontracted through Maker Governance to provide specific services to
MakerDAO. Members of DAO teams are independent market actors and are
not employed by the Maker Foundation.
The flexibility of Maker Governance allows the Maker community to adapt the
DAO team framework to suit the services needed by the ecosystem based onreal-world performance and emerging challenges.
Examples of DAO team member roles are the Governance Facilitator, who
supports the communication infrastructure and processes of governance,
and Risk Team members, who support Maker Governance with financial risk

research and draft proposals for onboarding new collateral and regulating
existing collateral.
While the Maker Foundation has bootstrapped Maker Governance to date, it
is anticipated that the DAO will take full control, conduct MKR votes, and fillthese varied DAO team roles in the near future.

The Dai Savings Rate
The ​Dai Savings Rate (DSR) allows any Dai holder to earn savings
automatically and natively by locking their Dai into the DSR contract in the
Maker Protocol. It can be accessed via the ​Oasis Save​ portal or throughvarious gateways​ into the Maker Protocol. ​Users aren’t required to deposit a
minimum amount to earn the DSR, and they can withdraw any or all of their
Dai from the DSR contract at any time.
The DSR is a global system parameter that determines the amount Dai
holders earn on their savings over time. When the market price of Dai
deviates from the Target Price due to changing market dynamics, MKR
holders can mitigate the price instability by voting to modify the DSR
accordingly:● If the market price of Dai is above 1 USD, MKR holders can choose togradually decrease the DSR, which will reduce demand and should
reduce the market price of Dai toward the 1 USD Target Price.
● If the market price of Dai is below 1 USD, MKR holders can choose togradually increase the DSR, which will stimulate demand and should
increase the market price of Dai toward the 1 USD Target Price.
Initially, adjustment of the DSR will depend on a weekly process, whereby
MKR holders first evaluate and discuss public market data and proprietarydata provided by market participants, and then vote on whether anadjustment is necessary or not. The long-term plan includes implementationof the DSR Adjustment Module, an Instant Access Module that directly
controls both the DSR and the Base Rate. This module allows for easy
adjustment of the DSR (within strict size and frequency boundaries set by
MKR holders) by an MKR holder on behalf of the larger group of MKR
holders. The motivation behind this plan is to enable nimble responses torapidly changing market conditions, and to avoid overuse of the standard
governance process ofExecutive Voting and Governance Polling.

Governance of the Maker Protocol
Use of the MKR Token in Maker Governance
The MKR token—the governance token of the Maker Protocol—allows those
who hold it to ​vote​ on changes to the Maker Protocol. Note that anyone, notonly MKR holders, can ​submit p​ roposals for an MKR vote.
Any voter-approved modifications to the governance variables of the Protocol
will likely not take effect immediately in the future; rather, they could bedelayed by as much as 24 hours if voters choose to activate the Governance
Security Module (GSM). The delay would give MKR holders the opportunity toprotect the system, if necessary, against a malicious governance proposal(e.g., a proposal that alters collateral parameters contrary to establishedmonetary policies or that allows for security mechanisms to be disabled) bytriggering a Shutdown.
Polling and Executive Voting
In practice, the Maker Governance process includes proposal polling andExecutive Voting. Proposal polling is conducted to establish a roughconsensus of community sentiment before any Executive Votes are cast. This
helps to ensure that governance decisions are considered throughtfully andreached by consensus prior to the voting process itself. Executive Voting isheld to approve (or not) changes to the state of the system. An example of an
Executive Vote could be a vote to ratify Risk Parameters for a newly acceptedcollateral type.
At a technical level, smart contracts manage each type of vote. A Proposal
Contract is a smart contract with one or more valid governance actions
programmed into it. It can only be executed once. When executed, it
immediately applies its changes to the internal governance variables of theMaker Protocol. After execution, the Proposal Contract cannot be reused.

Any Ethereum Address can deploy valid Proposal Contracts. MKR token
holders can then cast approval votes for the proposal that they want to electas the Active Proposal. The Ethereum address that has the highest number ofapproval votes is elected as the Active Proposal. The Active Proposal isempowered to gain administrative access to the internal governancevariables of the Maker Protocol, and then modify them.
The MKR Token’s Role in Recapitalization
In addition to its role in Maker Governance, the MKR token has acomplementary role as the recapitalization resource of the Maker Protocol. If
the system debt exceeds the surplus, the MKR token supply may increase
through a Debt Auction (see above) to recapitalize the system. This risk
inclines MKR holders to align and responsibly govern the Maker ecosystem
to avoid excessive risk-taking.
MKR Holder Responsibilities
MKR holders can vote to do the following:● Add a​ ​new​ ​collateral asset ​type with a unique set of Risk Parameters.
● Change the Risk Parameters of one or more existing collateral asset
types, or add new Risk Parameters to one or more existing collateral
asset types.
● Modify​ ​the Dai Savings Rate.
● Choose the set of Oracle Feeds.
● Choose the set of Emergency Oracles.
● Trigger Emergency Shutdown.
● Upgrade the system.
MKR holders can also allocate funds from the Maker Buffer to pay for various
infrastructure needs and services, including Oracle infrastructure andcollateral risk management research. The funds in the Maker Buffer are
revenues from Stability Fees, Liquidation Fees, and other income streams.
The governance mechanism of the Maker Protocol is designed to be as
flexible as possible, and upgradeable. Should the system mature under theguidance of the community, more advanced forms of Proposal Contracts
could, in theory, be used, including Proposal Contracts that are bundled. For
example, one proposal contract may contain both an adjustment of a Stability
Fee and an adjustment of the DSR. Nonetheless, those revisions will remain
for MKR holders to decide.

Risk Parameters Controlled by Maker Governance
Each Maker Vault type (e.g., ETH Vault and BAT Vault) has its own unique setof Risk Parameters that enforce usage. The parameters are determinedbased on the risk profile of the collateral, and are directly controlled by MKR
holders through voting.
The Key Risk Parameters for Maker Vaults are:● Debt​ ​Ceiling​:​ A Debt Ceiling is the maximum amount of debt that canbe created by a single collateral type. Maker Governance assigns every
collateral type a Debt Ceiling, which is used to ensure sufficient
diversification of the Maker Protocol collateral portfolio. Once acollateral type has reached its Debt Ceiling, it becomes impossible tocreate more debt unless some existing users pay back all or a portionof their Vault debt.
● Stability​ ​Fee​:​ The Stability Fee is an annual percentage yieldcalculated on top of how much Dai has been generated against a
Vault’s collateral. The fee is paid in Dai only, and then sent into theMaker Buffer.
● Liquidation​ ​Ratio​:​ ​A low Liquidation Ratio means Maker Governanceexpects low price volatility of the collateral; a high Liquidation Ratio
means high volatility is expected.
● Liquidation Penalty​:​ The Liquidation Penalty is a fee added to a
Vault’s total outstanding generated Dai when a Liquidation occurs. The
Liquidation Penalty is used to encourage Vault owners to keep
appropriate collateral levels.
● Collateral Auction Duration​: The maximum duration of Collateralauctions is specific to Maker Vaults. Debt and Surplus auction
durations are global system parameters.
● Auction Bid Duration:​ Amount of time before an individual bid expires
and closes the auction.
● Auction Step Size​: This Risk Parameter exists to incentivize earlybidders in auctions, and prevent abuse by bidding a tiny amount above
an existing bid.

Risk and Mitigation Responsibilities of Governance
The successful operation of the Maker Protocol depends on Maker
Governance taking necessary steps to mitigate risks. Some of those risks are
identified below, each followed by a mitigation plan.
A malicious attack on the smart contract infrastructure by a bad actor.
One of the greatest risks to the Maker Protocol is a malicious actor—a
programmer, for example, who discovers a vulnerability in the deployedsmart contracts, and then uses it to break the Protocol or steal from it.
In the worst-case scenario, all decentralized digital assets held as collateral in
the Protocol are stolen, and recovery is impossible.
Mitigation: ​The Maker Foundation's highest priority is the ​security of theMaker Protocol​, and the strongest defense of the Protocol is Formal
Verification. The Dai codebase was the first codebase of a decentralized
application to be ​formally verified​.
In addition to formal system verification, contracted security audits by thebest security organizations in the blockchain industry, third-party(independent) audits, and bug bounties are part of ​the Foundation’s security
roadmap​. To review the formal verification report and various Maker Protocol
audits, visit Maker’s ​Multi-Collateral Dai Security Github repository​.
These security measures provide a strong defense system; however, they are
not infallible. Even with formal verification, the mathematical modeling ofintended behaviors may be incorrect, or the assumptions behind the intended
behavior itself may be incorrect.
A black swan event
A black swan event is a rare and critical surprise attack on a system. For theMaker Protocol, examples of a black swan event include:● An attack on the collateral types that back Dai.
● A large, unexpected price decrease of one or more collateral types.
● A highly coordinated Oracle attack.

● A malicious Maker Governance proposal.
Please note that this list of potential "black swans" is not exhaustive and notintended to capture the extent of such possibilities.
Mitigation: ​While no one solution is failsafe, the careful design of the Maker
Protocol (the Liquidation Ratio, Debt Ceilings, the ​Governance Security
Module, ​the Oracle Security Module, Emergency Shutdown, etc.) in
conjunction with good governance (e.g., swift reaction in a crisis, thoughtful
risk parameters, etc.) help to prevent or mitigate potentially severe
consequences of an attack.
Unforeseen pricing errors and market irrationality
Oracle price feed problems or irrational market dynamics that cause
variations in the price of Dai for an extended period of time can occur. If
confidence in the system is lost, rate adjustments or even MKR dilution could
reach extreme levels and still not bring enough liquidity and stability to themarket.
Mitigation:​​ Maker Governance incentivizes a sufficiently large capital pool to
act as Keepers of the market in order to maximize rationality and market
efficiency, and allow the Dai supply to grow at a steady pace without major
market shocks. As a last resort, Emergency Shutdown can be triggered torelease collateral to Dai holders, with their Dai claims valued at the Target
Price.
User Abandonment for Less Complicated Solutions
The Maker Protocol is a complex decentralized system. As a result of its
complexity, there is a risk that inexperienced cryptocurrency users willabandon the Protocol in favor of systems that may be easier to use andunderstand.
Mitigation:​​ While Dai is easy to generate and use for most crypto enthusiasts
and the Keepers that use it for margin trading, newcomers might find theProtocol difficult to understand and navigate. Although Dai is designed insuch a way that users need not comprehend the underlying mechanics of theMaker Protocol in order to benefit from it, the ​documentation and numerous

resources​ consistently provided by the Maker community and the Maker
Foundation help to ensure onboarding is as uncomplicated as possible.
Dissolution of The Maker Foundation
The Maker Foundation currently plays a role, along with independent actors,
in maintaining the Maker Protocol and expanding its usage worldwide, while
facilitating Governance. However, the Maker Foundation plans to dissolve
once MakerDAO can manage Governance completely on its own. Should
MakerDAO fail to sufficiently take the reins upon the Maker Foundation's
dissolution, the future health of the Maker Protocol could be at risk.
Mitigation:​​ MKR holders are incentivized to prepare for the Foundation's
dissolution after it completes "gradual decentralization" of the project.
Moreover, successful management of the system should result in sufficient
funds for governance to allocate to the continued maintenance andimprovement of the Maker Protocol.
General Issues with Experimental Technology
Users of the Maker Protocol (including but not limited to Dai and MKR
holders) understand and accept that the software, technology, and technicalconcepts and theories applicable to the Maker Protocol are still unproven andthere is no warranty that the technology will be uninterrupted or error-free.
There is an inherent risk that the technology could contain weaknesses,
vulnerabilities, or bugs causing, among other things, the complete failure of
the Maker Protocol and/or its component parts.
Mitigation: ​See “A malicious attack on the smart contract infrastructure by a
bad actor” above. The Mitigation section there explains the technical auditingin place to ensure the Maker Protocol functions as intended.

Price Stability Mechanisms
The Dai Target Price
The Dai Target Price is used to determine the value of collateral assets Dai
holders receive in the case of an Emergency Shutdown. The Target Price for
Dai is 1 USD, translating to a 1:1 USD soft peg.

Emergency Shutdown
Emergency Shutdown (or, simply, Shutdown) serves two main purposes.
First, it is used during emergencies as a last-resort mechanism to protect theMaker Protocol against attacks on its infrastructure and directly enforce the
Dai Target Price. Emergencies could include malicious governance actions,
hacking, security breaches, and long-term market irrationality. Second,
Shutdown is used to facilitate a Maker Protocol system upgrade. The
Shutdown process can only be controlled by Maker Governance.
MKR voters are also able to instantly trigger an Emergency Shutdown by
depositing MKR into the Emergency Shutdown Module (ESM), if enough MKR
voters believe it is necessary. ​This prevents the Governance Security Module(if active) from delaying Shutdown proposals before they are executed. With
Emergency Shutdown, the moment a quorum is reached, the Shutdown
takes effect with no delay.
There are three phases of Emergency Shutdown:
1. The Maker Protocol shuts down; Vault owners withdraw assets.
When initiated, Shutdown prevents further Vault creation andmanipulation of existing Vaults, and freezes the Price Feeds. The frozen
feeds ensure that all users are able to withdraw the net value of assets
to which they are entitled. Effectively, it allows Maker Vault owners to
immediately withdraw the collateral in their Vault that is not actively
backing debt.
2. Post-Emergency Shutdown auction processing
After Shutdown is triggered, Collateral Auctions begin and must becompleted within a specific amount of time. That time period isdetermined by Maker Governance to be slightly longer than the
duration of the longest Collateral Auction. This guarantees that no
auctions are outstanding at the end of the auction processing period.
3. ​Dai​ ​holders​ ​claim​ ​their​ remaining ​collateral​
At the end of the auction processing period, Dai holders use their Dai
to claim collateral directly at a fixed rate that corresponds to thecalculated value of their assets based on the Dai Target Price. For
example, if the ETH/USD Price Ratio is 200, and a user holds 1000 Dai
at the Target Price of 1 USD when Emergency Shutdown is activated,

The user will be able to claim exactly 5 ETH from the Maker Protocol
after the auction processing period. There is no time limit for when a
final claim can be made. Dai holders will get a proportional claim toeach collateral type that exists in the collateral portfolio. Note that Dai
holders could be at risk of a haircut, whereby they do not receive thefull value of their Dai holdings at the Target Price of 1 USD per Dai. Thisis due to risks related to declines in collateral value and to Vault owners
having the right to retrieve their excess collateral before Dai holders
may claim the remaining collateral. For more detailed information on
Emergency Shutdown, including the claim priorities that would occur
as a result, see the ​published community documentation​.

The Future of the Maker Protocol: Increased
Adoption and Full Decentralization
Addressable Market
A cryptocurrency with price stability serves as an important medium of
exchange for many decentralized applications. As such, the potential market
for Dai is at least as large as the entire decentralized blockchain industry. But
the promise of Dai extends well beyond that into other industries.
The following is a non-exhaustive list of current and immediate markets forthe Dai stablecoin:● Working capital, hedging,​ ​and collateralized leverage​. Maker Vaults
allow for permissionless trading by users, who can use the Dai
generated against Vault collateral for working capital. To date, there
have been numerous instances where Vault owners use their Dai to buy
additional ETH (same asset as their collateral), thereby creating aleveraged but fully collateralized position.
● Merchant​ ​receipts,​ ​cross-border​ ​transactions,​ ​and​ ​remittances​.
F​oreign exchange volatility mitigation and a lack of intermediaries mean
the transaction costs of international trade are significantly reduced
when using Dai.
● Charities and NGOs​ when using transparent distributed ledger
technology.

● Gaming. ​For blockchain game developers, Dai is the currency ofchoice. With Dai, game developers integrate not only a currency, butalso an entire economy. The composability of Dai allows games tocreate new player behavior schemes based around decentralized
finance.
● Prediction​ ​markets​​.​ Using a volatile cryptocurrency when making an
unrelated prediction only increases one’s risk when placing the bet.
Long-term bets become especially infeasible if the bettor must also
gamble on the future price of the volatile asset used to place the bet.
That said, the Dai stablecoin would be a natural choice for use inprediction markets.

Asset Expansion
Should MKR holders approve new assets as collateral, those assets will be
subject to the same risk requirements, parameters, and safety measures as
Dai (e.g., Liquidation Ratios, Stability Fees, Savings Rates, Debt Ceilings,etc.).

Evolving Oracles
MakerDAO was the first project to run reliable Oracles on the Ethereum
blockchain. As a result, many decentralized applications use MakerDAO
Oracles to ensure the security of their systems and to provide up-to-dateprice data in a robust manner. This confidence in MakerDAO and the Maker
Protocol means that Maker Governance can expand the core Oracle
infrastructure service to better suit the needs of decentralized applications.

Conclusion
The Maker Protocol allows users to generate Dai, a stable store of value thatlives entirely on the blockchain. Dai is a decentralized stablecoin that is notissued or administered by any centralized actor or trusted intermediary or
counterparty. It is unbiased and borderless —available to anyone, anywhere.
All Dai is backed by a surplus of collateral that has been individually
escrowed into audited and publicly viewable Ethereum smart contracts.

Anyone with an internet connection can monitor the health of the system
anytime at ​daistats.com​.
With hundreds of partnerships and one of the strongest developer
communities in the cryptocurrency space, MakerDAO has become the engineof the decentralized finance (DeFi) movement. Maker is unlocking the powerof the blockchain to deliver on the promise of economic empowerment today.
For more information, visit the ​MakerDAO website​.

APPENDIX
Dai Use-Case Benefits and Examples
The Maker Protocol can be used by anyone, anywhere, without any
restrictions or personal-information requirements. Below are a few examples
of how Dai is used around the world:
Dai Offers Financial Independence to All
According to the World Bank’s Global Findex Database 2017, about 1.7
billion adults around the world are unbanked.5 In the US alone, according to a2017 survey by the FDIC, around 32 million American households are either
unbanked or underbanked,6 meaning that they either have no bank accountat all or they regularly use alternatives to traditional banking (e.g., payday or
pawn shop loans) to manage their finances. Dai can empower every one ofthose people; all they need is access to the internet.
As the world’s first unbiased stablecoin, Dai allows anyone to achievefinancial independence, regardless of their location or circumstances. For
example, in Latin America, Dai has provided an opportunity for individuals
and families to hedge against the devaluation of the Argentine peso7 and the
Venezuelan bolívar. On the islands of Vanuatu in the South Pacific, whereresidents pay very high money transfer fees, Oxfam International, aU.K.-based non-profit; Australian startup, Sempo; and Ethereum startup​https://globalfindex.worldbank.org/
https://www.fdic.gov/householdsurvey/
7​https://slideslive.com/38920018/living-on-defi-how-i-survive-argentinas-50-inflation
5
6

ConsenSys have successfully piloted a cash-assistance program throughwhich 200 residents on the island of Efate were each given 50 Dai to pay a
local network of vendors.8

Self-Sovereign Money Generation
Oasis Borrow allows users to access the Maker Protocol and generate Dai bylocking their collateral in a Maker Vault. Notably, users do not need to access
any third-party intermediary to generate Dai. Vaults offer individuals andbusinesses opportunities to create liquidity on their assets simply, quickly,
and at relatively low cost.

Savings Earned AutomaticallyDai holders everywhere can better power their journeys to financial inclusion
by taking advantage of the Dai Savings Rate, which, as detailed earlier, builds
on the value of Dai by allowing users to earn on the Dai they hold and protect
their savings from inflation.
For example, if Bob has100,000 Dai locked in the DSR contract, and the DSR
set by Maker Governance is 6% per year, Bob will earn savings of 6,000 Dai
over 12 months. Additionally, because exchanges and blockchain projects
can integrate the DSR into their own platforms, it presents new opportunities
for cryptocurrency traders, entrepreneurs, and established businesses toincrease their Dai savings and Dai operating capital. Due to this attractive
mechanism, Market Makers, for example, may choose to hold their idle
inventory in Dai and lock it in the DSR.

Fast, Low-cost Remittances
Cross-border remittances, whether for the purchase of goods or services or
to simply send money to family and friends, can mean high service andtransfer fees, long delivery timelines, and frustrating exchange issues due to
inflation. The Dai stablecoin is used around the world as a medium of
exchange because people have confidence in its value and efficiency.
Remittance users benefit from Dai in the following ways:

8​https://www.coindesk.com/oxfam-trials-delivery-of-disaster-relief-using-ethereum-stablecoin-dai

● Low-cost domestic and international transfers.​ Dai provides
immediate cost savings, as low gas fees replace high bank and wire
service fees. Low cost allows for more frequent transactions.
● Anytime service.​ Dai doesn’t rely on bank-like hours of operation. The
Maker Protocol can be accessed 24/7/365.
● Convenient on/off ramps.​ Users can take advantage of the many fiat
on and off ramps that exchange fiat currencies to Dai. These options
allow users to bridge the gap between the fiat and cryptocurrency
world, and easily cash out Dai holdings in their local currencies.
● Increased security and confidence.​ The blockchain offers high levelsof security and consumer trust.

Stability in Volatile Markets
As noted above, Dai is both a readily accessible store of value and a powerful
medium of exchange. As such, it can help protect traders from volatility. For
example, it provides traders with a simple way to maneuver between
positions smoothly and remain active in the market without having to cashout and repeat an on-ramp/off-ramp cycle.

Dai as an Ecosystem Driver and DeFi Builder
As more and more users become aware of Dai’s value as a stablecoin, moredevelopers are integrating it into the dapps they build on the Ethereum
blockchain. As such, Dai is helping to power a more robust ecosystem. In
short, Dai allows dapp developers to offer a stable method of exchange totheir users who would rather not buy and sell goods and services using
speculative assets.
Additionally, because Dai can be used to pay for gas in the Ethereum
ecosystem, by creating DeFi dapps that accept Dai instead of ETH,
developers offer users a smoother onboarding experience and a betteroverall experience.

Glossaries

● MakerDAO Glossary of Terms● Maker Protocol Glossary​ (terms, variables, functions, and more)

System and Community Resources
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MakerDAO on GitHub​​
MakerDAO Documentation
MakerDAO.com
The MakerDAO Blog
The MakerDAO ForumThe MakerDAO Chat
MakerDAO on Reddit
MakerDAO on Twitter