Mike McDonald, creator of MKR Tools, revealed that 1,000,000 ETH – roughly 1% of the total supply of Ether – are locked in a MakerDAO’s smart contract.

The announcement was made on Tuesday on Twitter:

Created in 2015, MakerDAO is a decentralized autonomous organization that focuses on developing blockchain technology. MakerDAO is comprised of collateral loans, a decentralized governance system, and a stable coin known as Dai.

Dai is the first fully-decentralized stablecoin on Ethereum. A decentralized platform running on the Ethereum blockchain, the Dai Stablecoin System is responsible for creating and issuing Dai. Although it is pegged to the U.S. dollar in a similar way to many other stable coins, Dai is not backed by U.S. dollar reserves but by a pool of ether (PETH).

How Does it Work?

The MakerDAO is responsible for minimizing the volatility of Dai through Collateralized Debt Positions (CDPs), incentivized external actors, and autonomous feedback mechanisms. In order to achieve all of this, a utility and governance token (MKR) was created. MKR is responsible for the decentralized governance of MakerDAO, as the token is used to vote on business and management decisions, while also serving as a fee on CDPs used for generating Dai.

It is relevant to note that, although there is 1 million ETH locked up in the MakerDAO primary smart contract, not all of it contributes to Dai’s market cap. The current market capitalization of the DAI token is $74 million, which reflects only about one third of the value of all the pooled ETH.

Since the inception of the Dai decentralized platform in mid 2015, a total of just over 103 million ETH have been generated, with the initial 72 million coming from the crowdsale. Most notably, a Silicon Valley venture capital firm, Andreessen Horowitz (a16z), invested $15 million in the MakerDAO. The venture capital firm now owns 6% of the total supply of MKR token.

Many supporters of Dai believe that it is a game changer and that it will be able to solve complex problems. Others remain skeptical and point out some of the potential flaws of Dai: Sid Shekhar, one of the co-founders of TokenAnalyst, pointed out:

“There remains the possibility of the incentive structures not working as expected – especially when the price of ETH keeps dipping and its value is worth less than the amount of Dai that is supposed to be backing (…) In this situation under-collateralization, the Maker system triggers a liquidation of the CDP's collateral, automatically selling it off to the highest bidders for Dai as fast as possible to recapitalize and ensure that the Dai that it issued to the original user it fully centralized.”