What is MakerDAO and why did it remain one of the biggest DeFi protocols in 2022

For example, if a user deposits $100 worth of ETH in MakerDao, they can withdraw up to $66 in the form of DAI. The locked-up ETH is akin to collateral one pays to a bank while withdrawing a loan. When users want to withdraw their ETH, they just need to pay back the borrowed amount along with the interest and any fees involved with the transaction. Once the DAI is returned to the ecosystem, it is automatically destroyed so that its price remains stable.

But what happens in case a user is not able to repay their loan? In such a case, MakerDAO liquidates the users’ collateral and then auctions the locked-up Ether to others in the MakerDAO community. This system ensures that the project remains solvent and financially stable. Additionally, another token part of the ecosystem, called Maker, ensures that the price of DAI remains stable.

With its model, MakerDAO was among the many projects that popularized collateralised-backed crypto lending. When Ethereum creator Vitalik Buterin was asked in a 2021 interview what he thought was the most interesting concept in Ethereum, he replied by saying that he was ‘definitely impressed’ by MakerDAO and then proceeded to explain how its model could be applied to other assets besides crypto.

Naturally, its model drew a large number of community members, and by December 2021, less than 5 years after DAI’s debut, MakerDAO had become the largest DeFi protocol in the market, with a total value locked of nearly $18 billion. For the uninitiated, the Total Value Locked (TVL) is an important gauge of the financial health of a DeFi project. It represents the worth value of all assets locked and staked in a network. A higher TVL is indicative of higher engagement amongst users. To find out more, you can read this article.

While December 2021 was a landmark year for MakerDAO, and by extension, the DeFi market, 2022 was very different. Bitcoin’s price dropped to multi-year lows of $19,000, pulling down the entire sector. Around the same time, research firm Nansen stated that the TVL count of the total DeFi sector would fall by 76 percent in 2022 due to a strained crypto economy.

Meanwhile, MakerDAO’s TVL began to dry up and eventually dropped to as low as $5.7 billion come November 2022. Nansen explained that the protocol was hit by weakening demand for loans, which resulted in a sharp TVL decline. Nonetheless, the drop was consistent among all DeFi tokens regardless of their success.

However, MakerDAO made its presence known in the aftermath of the UST-Terra crash. Following an ill-conceived algorithm that led to stablecoin Terra’s ultimate demise, other stablecoins such as USDT and USDC were dumped on market, causing them to lose their peg against the dollar. Meanwhile, reports emerged that users were loading up on DAI, with the stablecoin trading at a premium for a brief moment in May 2022. Most of its hype came down to its model, which was different from other stablecoins in the market. Unlike USDT and USDC which are owned by central authorities and backed by traditional assets, DAI is backed by a variety of over-collateralised cryptocurrencies. While it is too soon to determine whether its algorithm is superior to its competitors, many consider it to be a safer bet.

Furthermore, transparency is another key feature of MakerDAO that makes it well-received in the community. Its reserves can be audited on-chain since it is backed by traceable cryptocurrencies, while the likes of USDT and USDC need to open their books to external auditors. After all, proof-of-reserves is what eventually makes a stablecoin stable.

The project has released a thought-provoking report last month which showcased MakerDAO’s performance in 2022. Although the project suffered from a 79% year-on-year drop in operating profits, it still managed to keep its head above water by recording positive earnings of $19 million profit during the year. Many highlighted that its transition from the crypto lending space to Real World Assets (RWA) allowed it to realize an additional revenue stream. Analytics firm Delphi Digital recently indicated that MakerDAO has made a $3.8 million profit up until March 2023 via investments in US short-term treasuries.

Despite a tough 2022, MakerDAO rode the storm and came out the other side while still making a profit. In the abovementioned report, Maker stated that the project exited 2022 ‘unscathed’ despite high market volatility.

At the time of writing, MakerDAO’s TVL hovers around $7.76 billion but given its prospects based on past performance, one can expect the protocol to remain among the heavyweights in the DeFi sector.