Multi-Collateral DAI

The Dai Savings Rate is a core feature of MCD that allows DAI holders to earn savings by depositing their tokens into the DSR contract. The rate is set by MakerDAO governance and acts as a monetary policy tool to influence demand for DAI, helping to maintain its peg to the US dollar by incentivizing holding or spending.

MCD introduced an upgraded auction-based liquidation system to handle undercollateralized vaults more efficiently. When a vault's collateral ratio falls below its minimum, it is liquidated via:

• Collateral Auctions: Selling the vault's collateral for DAI to cover the debt.
• Debt Auctions: Minting and selling new MKR tokens to recapitalize the system if collateral auctions don't cover the debt. This system is designed to be more robust and decentralized.

The MKR token is central to governing the Multi-Collateral DAI system. MKR holders vote on:

• Adding new collateral types and their risk parameters.
• Adjusting the Dai Savings Rate (DSR) and Stability Fees.
• Other protocol upgrades. Stability Fees paid by vault users are used to buy and burn MKR in a surplus auction, creating a deflationary mechanism and aligning MKR holders with the system's health.

MCD employs multiple mechanisms to maintain the 1 DAI = ~1 USD peg:

• The Dai Savings Rate (DSR) incentivizes holding DAI when its market price is low.
• Adjustable Stability Fees make minting DAI more or less expensive, influencing supply.
• In extreme cases, Emergency Shutdown can be activated by MKR holders to settle all vaults at a fixed collateral-to-DAI rate, providing a final redemption guarantee.

A Vault (formerly called a Collateralized Debt Position or CDP) is the core user-facing mechanism. Users lock approved collateral assets (e.g., ETH, WBTC) to generate DAI stablecoins as a loan. The system enforces a collateralization ratio to ensure solvency, with undercollateralized positions subject to liquidation.

• Key Parameters: Debt Ceiling, Stability Fee, Liquidation Ratio.
• User Action: Users manage their own risk by adding/removing collateral or repaying DAI.

Unlike its single-collateral predecessor (SAI), MCD supports a dynamic and expanding set of collateral types. Each type is added via Maker Governance votes and has unique risk parameters.

• Examples: ETH (WETH), wrapped Bitcoin (WBTC), real-world asset vaults (RWA).
• Risk Assessment: Each asset has a Risk Premium and Debt Ceiling set by governance, reflecting its volatility and liquidity.

The DAI Savings Rate is a fundamental monetary policy tool. It is the interest rate paid to users who lock their DAI in the DSR contract. By adjusting the DSR, Maker Governance can influence the demand for DAI, helping to maintain its peg to the US dollar.

• Function: Incentivizes holding DAI when supply is high.
• Mechanism: A global parameter applied to all DAI deposited in the DSR module.

This system ensures the protocol remains overcollateralized. It consists of Oracles (for price feeds), Liquidators (who trigger auctions), and Keepers (who participate in them).

• Liquidation Process: An undercollateralized Vault is auctioned off. Its collateral is sold for DAI in a Collateral Auction to cover the debt.
• Surplus Buffer: Excess DAI from fees and auction profits is stored in the Surplus Buffer, a key risk mitigation fund.

The system is governed in a decentralized manner by MKR token holders. They vote on executive proposals to manage all critical parameters.

• Governance Actions: Adding new collateral types, adjusting risk parameters (e.g., Stability Fee, DSR), and upgrading system modules.
• Emergency Shutdown: A last-resort mechanism where MKR holders can vote to freeze the system and settle all positions at a fixed collateral-to-DAI price.

MCD manages two primary balance sheets: System Surplus and System Debt.

• Surplus Buffer: Accumulates revenue from Stability Fees and liquidation penalties. Used to cover system deficits.
• Protocol Debt: Occurs if collateral auctions do not cover the bad debt of a liquidated Vault. This debt is covered first by the Surplus Buffer and, if insufficient, is automatically monetized through MKR dilution via Debt Auctions.

The Maker Protocol accepts a wide range of crypto assets as collateral, each governed by specific risk parameters set by Maker Governance. Key parameters include:

• Debt Ceiling: The maximum DAI that can be minted against a specific collateral type.
• Liquidation Ratio: The minimum collateral-to-debt ratio required to avoid liquidation.
• Stability Fee: The annual interest rate on DAI debt, paid in MKR. Examples of collateral types include ETH (WSTETH-A), LP tokens (UNIV2DAIUSDC-A), and real-world assets (RWA).

Users interact with the protocol by opening Maker Vaults (formerly CDPs) to generate DAI. The process involves:

• Locking Collateral: Depositing approved assets into a vault.
• Generating DAI: Drawing debt up to a limit defined by the vault's collateralization ratio.
• Managing Risk: Users must maintain a collateralization ratio above the Liquidation Ratio to avoid liquidation, where collateral is automatically sold at a penalty to cover the debt. Vaults can be managed via interfaces like Oasis.app.

DAI serves as a foundational stable asset and liquidity layer across DeFi. Common integrations include:

• Lending Markets: Used as a primary borrow/supply asset on platforms like Aave and Compound.
• Decentralized Exchanges (DEXs): A core trading pair (e.g., DAI/USDC) on Uniswap and Curve pools.
• Yield Strategies: Collateral in yield aggregators and as a stable component in liquidity provider (LP) positions.
• Payments & Salaries: Used for crypto-native payroll and merchant payments due to its stability.

The Peg Stability Module (PSM) is a core contract that directly supports DAI's $1 peg by allowing 1:1 swaps between DAI and other highly liquid stablecoins like USDC. Key mechanics:

• Users deposit USDC to mint new DAI instantly at a 1:1 ratio (minus a small fee).
• Users can burn DAI to redeem USDC.
• This arbitrage mechanism creates a strong price floor and ceiling, as deviations from $1 create profitable swap opportunities. The PSM's debt ceiling is controlled by Maker Governance.

Maker Governance, powered by MKR token holders, controls all critical system parameters. A key lever is the DAI Savings Rate (DSR), which:

• Is a global interest rate paid to users who lock DAI in the DSR contract.
• Acts as a monetary policy tool. Increasing the DSR incentivizes holding DAI, reducing supply and supporting the peg. Decreasing it has the opposite effect.
• The DSR is funded by the Stability Fees collected from vault users, creating a closed-loop economic system.

The Maker Protocol generates sustainable revenue through fees, which accrue to its Surplus Buffer and are used to back the DAI stablecoin. Primary revenue streams include:

• Stability Fees: Interest paid by vault users on outstanding DAI debt.
• Liquidation Penalties: Fees incurred during vault liquidations.
• PSM Swap Fees: Fees charged for swaps through the Peg Stability Module. Excess surplus can be used to buy back and burn MKR tokens. This revenue model funds system operations and growth without relying on traditional seigniorage.

DAI is backed by volatile assets like ETH and WBTC. If the collateral value falls too close to the borrowed DAI value, positions are automatically liquidated via auctions. Key risks include:

• Liquidation Penalty: Users pay a fee (e.g., 13%) on top of their debt.
• Auction Failure: If auctions fail to cover the debt, the system relies on the Surplus Buffer and, ultimately, MKR dilution to recapitalize.
• Collateral Concentration: Over-reliance on a single asset type increases systemic risk.

The Maker Oracle Module provides the price feeds that determine collateral values and trigger liquidations. This is a critical centralization and security point.

• Single Point of Failure: Historically, a small set of trusted oracles feeds data to a medianizer contract.
• Manipulation Attacks: Incorrect price data could trigger unjust liquidations or allow undercollateralized borrowing.
• Governance Dependency: Oracle whitelists and parameters are controlled by Maker Governance, requiring high trust in MKR token holders.

All critical system parameters are set by MakerDAO governance via Executive Votes. This introduces political and operational risk.

• Parameter Mismanagement: Incorrect settings for Stability Fees, Debt Ceilings, or Liquidation Ratios can destabilize DAI's peg.
• Governance Attacks: A malicious actor acquiring sufficient MKR could vote in harmful changes, though time delays (the GSM Pause Delay) provide a mitigation window.
• Voter Apathy: Low participation can lead to decisions made by a small, potentially unrepresentative group.

DAI is issued by the Maker Protocol, a system of interconnected smart contracts (Vaults, Jug, Vow, etc.).

• Code Exploits: Bugs in the core protocol or in newly added Collateral Adapters could lead to fund loss. The system has undergone multiple formal verifications and audits.
• Upgrade Complexity: The protocol uses a proxy pattern for upgrades. A malicious or buggy governance upgrade could compromise the entire system.
• Dependency Risk: Relies on the security of underlying blockchain (Ethereum) and integrated DeFi protocols.

Maintaining the 1 USD peg is non-trivial and relies on several active mechanisms.

• Reflexivity: During market crashes, mass liquidations can create selling pressure on collateral, potentially creating a downward spiral.
• Dai Savings Rate (DSR) Efficacy: Using the DSR to control demand is a primary tool, but its effectiveness depends on market conditions and competitor rates.
• Black Swan Events: An extreme, rapid drop in collateral value could overwhelm the Protocol Surplus and MKR backing, breaking the peg.

Users often interact with DAI through third-party interfaces and integrated protocols, adding layers of risk.

• Vault Frontends: Websites like Oasis.app are convenience layers; interacting with malicious frontends can lead to theft.
• DeFi Composability: DAI is used across lending (Compound, Aave) and DEX protocols. Exploits in those systems can impact DAI liquidity and perception.
• Centralized Exchange Risk: Holding DAI on a CEX subjects users to custodial and regulatory risks of that exchange.