The first thing that comes to your mind about cryptocurrency is volatility and speculation. But what if I tell you that there is a digital token that alleviates the volatile nature of crypto? Yes, the answer to this is Maker Token (MKR).
Understanding Maker Token (MKR)
Maker Token is a cryptocurrency tied to a smart contract platform, deployed on the Ethereum blockchain network. As a result, the Maker Token’s life ends soon as the smart contracts end.
The token uses smart contracts called Collateralized Debt Positions (CDP) to stabilize the value of bonds called DAI. Because of its nature of issuance, MKR is more stable in comparison to other digital currencies.
One can exchange MKR tokens using any Ethereum account or through smart contracts programmed to use the MKR transfer function.
Deciding the Value of Maker Token
Maker Token’s value is attributed to the value of a DAI stablecoin. DAI is the core cryptocurrency of the MakerDAO system pegged to the USD in a 1:1 ratio. Additionally, the Maker Token uses interest rates to stabilize its prize.
Anyone with collateral assets can use the token to purchase DAI on the Maker platform through CDP smart contracts. The CDPs hold assets deposited by the users allowing them to generate DAI.
Note that purchasing the DAI also incurs debt. This helps to stabilize the value of MKR tokens as the debt locks the deposited collateral inside the CDP. Only when the DAI payment is complete, one can unlock the debt. Once the user completes the DAI payment, he/she is free to withdraw the collateral and begin further trading.
The MKR whitepaper notes that “Active CDPs are always collateralized in excess, meaning that the value of the collateral is higher than the value of the debt.”
The generation of DAI and the amount funded into the CDP are directly related to each other. The growing need of DAI proportionately increases the need for CDP thereby resulting in a larger amount of MKR.
To understand the transaction of MKR tokens, read the “CDP Interaction Process” explained in its whitepaper.
MKR – A Self-Regulating Digital Token
The modus operandi of MKR tokens show that it is a self-regulating crypto token. The token’s goal is to over-collateralize the CDPs to mitigate the risks of insolvency.
If the CDP is undercollateralized, it will trigger the Automatic Recapitalization feature. As a result, it forces the dilution of MKR by automatically generating new MKR and selling it back to the platform. This helps to bring back the balance from the point of insolvency.
This ultimately mitigates the chances of fraud or bad behavior.
This article should not be taken as, and is not intended to provide, investment advice. Users are ultimately responsible for the investment decisions he/she/it makes based on this information. It is your responsibility to review, analyze and verify any contenct/information before relying on them. Trading is a highly risky activity. Do consult your financial adviser before making any decision. Please conduct your thorough research before investing in any cryptocurrency and read our full disclaimer.