MakerDAO Explained: How DAI, Vaults and Governance Work

MakerDAO is a decentralized autonomous organization on Ethereum that built and governs the Maker Protocol, the system that creates the DAI stablecoin. DAI is designed to track one US dollar, but unlike a stablecoin issued by a single company, it is generated by smart contracts when people lock up collateral and borrow against it.

Three ideas sit at the centre of the design:

• Collateralized debt positions. A user deposits approved crypto assets into a smart contract called a vault and borrows DAI against them. The loan must always be worth less than the collateral.
• Governance by token holders. Holders of the governance token vote on which assets are accepted, how much risk the system takes, and what fees apply. Historically that token was MKR.
• Market-driven stability. Fees, savings rates, liquidations and direct swap modules push DAI toward its $1 target without a central party setting the price.

In practice, DAI became one of the most widely used decentralized stablecoins and a base asset across DeFi lending, trading and payments. The protocol also pioneered several patterns that newer projects copied, including on-chain risk parameters and a savings rate paid by the protocol itself.

One naming point matters for anyone reading older material. In 2024 MakerDAO began rebranding as Sky, with new tokens alongside the originals. Much of the machinery described below still applies, and the Maker name remains common in tools, forums and documentation. A later section covers exactly what changed.

MakerDAO began in 2014 and launched its first live system in December 2017 as Single-Collateral Dai, later called SAI, which accepted only ETH. That design was simple but concentrated risk in one asset.

In November 2019 the protocol moved to Multi-Collateral Dai, the version people mean when they say DAI today. It allowed several collateral types and introduced the Dai Savings Rate. The change also gave governance much more to manage, because each new asset needed its own risk settings.

The main milestones since then:

• March 2020. A sharp market crash, often called Black Thursday, exposed weaknesses in the original liquidation auctions.
• After 2020. The Peg Stability Module was added, letting users swap certain stablecoins for DAI at a fixed rate. Liquidations were later rebuilt around Dutch auctions.
• 2021 onward. Governance voted to accept tokenized real-world assets, such as short-term treasury exposure, as backing for DAI.
• 2024. The project announced a rebrand to Sky. USDS arrived as an upgraded stablecoin that holders can opt into from DAI, and SKY became a new governance token that MKR holders can convert to at a fixed rate. Both conversions are optional, and DAI continues to operate.

The rebrand came with a long-term restructuring plan that moves activity into semi-independent sub-projects. SparkLend, a lending market that draws on Sky's liquidity, is one example. For current token supply, adoption and plans, check the official Sky governance forum and dashboards rather than relying on any article, this one included.

DAI is minted when someone opens a vault and draws debt against collateral. The process looks like this:

1. Choose a collateral type. Governance approves a list of assets, and each has its own vault type with its own rules.
2. Deposit collateral. The user sends the asset to the vault contract, which holds it on-chain.
3. Generate DAI. The user borrows up to a limit set by the collateralization ratio. The newly minted DAI goes to their wallet.
4. Pay the stability fee. Interest accrues on the debt as a variable rate set by governance for that vault type.
5. Repay and withdraw. To get the collateral back, the user returns the DAI plus accrued fees. The returned DAI is burned.

A simple example for illustration only: if a vault type requires 150% collateralization, then $15,000 of collateral supports at most $10,000 of DAI. Real minimum ratios differ by asset, and safer assets generally have lower minimums.

Two more limits apply. A debt ceiling caps how much DAI can be created against each collateral type, which restricts exposure to any one asset. A minimum vault size, sometimes called dust, prevents tiny positions that would cost more in gas to liquidate than they hold.

Because borrowers can mint against assets they believe will rise, vaults are popular for leverage and for borrowing without selling. They are also where most risk lives, which is why tools such as DeFi Saver exist to automate repayment or add collateral before a vault becomes unsafe.

DAI is not redeemable from a bank, so the protocol relies on incentives to hold the price near $1. Several levers work together.

Overcollateralization. Every DAI minted from a vault is backed by more than a dollar of assets, which gives a cushion when prices move.

Stability fees. Governance can raise the borrowing rate to discourage new DAI creation when DAI trades below $1, or lower it to encourage more supply when DAI trades above $1.

Dai Savings Rate (DSR). Users can lock DAI in a savings contract and earn a rate set by governance. A higher rate increases demand for DAI and tends to pull the price up. In the Sky system this appears as the Sky Savings Rate for USDS, and the rate changes, so check the live dashboard.

Peg Stability Module. The PSM lets users swap approved stablecoins for DAI, and the reverse, at close to one-to-one. If DAI trades off-peg, traders can profit from swapping, which corrects the price. The trade-off is that large amounts of DAI become backed by centralized stablecoins and inherit their risks.

Liquidations. If a vault falls below its minimum ratio, collateral is sold to cover the debt. This keeps the system solvent.

Emergency Shutdown. If something goes seriously wrong, governance can freeze the system so DAI holders and vault owners can claim their share of collateral directly.

None of these guarantees a perfect peg, but together they have kept DAI close to $1 through most market conditions.

A vault is safe only while its collateral value stays above the minimum ratio. If it drops below, anyone can trigger a liquidation. The protocol auctions off enough collateral to repay the debt, and the vault owner pays a liquidation penalty, a percentage added to the debt that goes to the system. What is left after the sale returns to the owner.

The early auction mechanism was tested in March 2020. ETH fell quickly, the Ethereum network became congested, and keepers (the bots that bid on auctions) struggled to submit transactions. Some auctions closed with winning bids of zero DAI, so collateral was lost without covering debt. The system was left with bad debt, which was resolved by minting and auctioning new MKR to recapitalize it.

That episode shaped later changes:

• Dutch auctions. The newer liquidation system starts a price high and lowers it over time until someone buys, which reduces the chance of zero-bid outcomes.
• More collateral diversity. Governance added assets and the PSM so the system depends less on one volatile asset.
• Tighter parameters. Debt ceilings, ratios and oracle delays are reviewed regularly.

For vault owners, the practical lessons are:

• Keep a large buffer above the minimum ratio rather than borrowing the maximum.
• Watch the position during volatile markets, or use automation tools.
• Remember that gas costs can spike when the market moves fast.
• Treat the liquidation price shown in the interface as a warning level, not a target.

MakerDAO has no company at the top. Rules change through votes by holders of its governance token, weighted by how many tokens they lock in the voting contract.

MKR is the original governance token. It has two roles. First, it carries voting power. Second, it acts as a backstop: if the system ends up with bad debt that collateral cannot cover, new MKR can be minted and sold to raise DAI, which dilutes holders. Surplus fees, in turn, have been used to buy and burn MKR or to fund other budgets, depending on governance decisions at the time.

SKY arrived with the Sky rebrand as a newer governance token. MKR holders can convert to SKY at a fixed rate, and the conversion is optional. Check current documentation for how each token is used in voting and for the reserve and reward systems built around them.

Governance generally uses two kinds of votes:

• Polls. Signalling votes that gauge community opinion and approve decisions in principle.
• Executive votes. Bundles of changes that are actually written into the smart contracts once they win enough support.

A governance delay sits between a passed executive vote and its execution, giving users and other participants time to react or exit if a change looks harmful.

The weak point of any token vote is concentration. A few large holders or delegates can have outsized influence, and low turnout makes it easier for small groups to steer decisions. Reading the governance forum and recent vote outcomes will show how decisions are really made.

Early DAI was backed only by ETH. Today the collateral set is broader, and it is one of the most debated parts of the design.

Crypto-native collateral. This includes ETH, staked ETH tokens from liquid staking protocols such as Lido and Rocket Pool, and wrapped Bitcoin. These are transparent and on-chain, but volatile.

Stablecoins via the PSM. Swapping centralized stablecoins into DAI created a large, steady source of backing and helped the peg. It also ties DAI to the issuers of those coins, which can freeze assets or face regulatory action.

Real-world assets (RWAs). Governance approved vaults that hold short-term government debt and other credit exposure through legal structures and partners. This generates revenue for the protocol, but it adds off-chain legal and counterparty risk that smart contract audits cannot remove.

Each collateral type has risk settings governance must tune: minimum ratio, debt ceiling, stability fee and liquidation penalty. Specialist risk teams and recognised risk managers such as Gauntlet have produced analysis in DeFi lending, and Maker has relied on a mix of delegates and contributors for similar work.

For readers assessing DAI, the useful question is not just how much collateral exists, but what type it is. A system backed mainly by on-chain crypto has different failure modes from one backed by stablecoins and off-chain credit. Look at the live collateral breakdown on the protocol's own dashboards before relying on historical descriptions.

You do not have to open a vault to use DAI. Most people meet it in other ways.

Holding and paying. DAI works as a dollar-pegged token for payments, trading pairs and moving value between wallets and chains. Liquidity is deep on decentralized exchanges such as Uniswap.

Saving. The Dai Savings Rate, and in the Sky system the Sky Savings Rate for USDS, pays a governance-set yield on deposited stablecoins. Rates move, so check the live figure rather than trusting any quoted number.

Lending and borrowing elsewhere. Aave, Compound, Euler and SparkLend all accept stablecoins like DAI for lending or as the asset to borrow. SparkLend in particular is connected to Sky's liquidity layer and uses governance-set rates.

Alternative CDP systems. If you want to borrow against crypto with a different design, Liquity V2 lets borrowers set their own interest rate and mint BOLD, and Frankencoin issues a Swiss franc stablecoin through an oracle-free model.

A comparison of approaches:

Approach	What you do	Main risk
Maker or Sky vault	Lock collateral, mint DAI or USDS	Liquidation, governance changes
Savings rate	Deposit DAI or USDS	Smart contract and rate changes
Lending market	Supply or borrow stablecoins	Market utilization, liquidation
Other CDP protocol	Mint a different stablecoin	Different peg and design risks

Before interacting, confirm you are using the official interface and verify the contract addresses from the project's own documentation.

DAI has a long record, but a track record does not remove risk. The main categories are:

• Smart contract risk. Bugs in the protocol or in connected modules could cause losses. Audits reduce this but never eliminate it.
• Oracle risk. Vaults rely on price feeds. A faulty or manipulated feed can trigger wrongful liquidations or allow undercollateralized borrowing. Maker uses a delay on price updates to mitigate this.
• Governance risk. Token-holder votes can add risky collateral, change fees abruptly or be swayed by large holders. Complex plans and rebrands also make it harder for ordinary users to follow changes.
• Centralization risk. Heavy backing by centralized stablecoins and legal-structure RWAs means DAI is not fully independent of traditional finance, issuers or regulators.
• Peg risk. A sharp crash or loss of confidence in major collateral could push DAI off $1, at least temporarily.
• User risk. Fake interfaces, malicious token approvals and phishing are the most common ways individuals lose funds.

Defensive habits that help:

• Bookmark the official app and check contract addresses against the documentation.
• Review and revoke token approvals you no longer need.
• Use a hardware wallet for any meaningful amount.
• Avoid borrowing near the minimum ratio and set alerts for your position.
• Follow official governance channels for parameter changes that affect your vault.

Nothing here is financial advice. DeFi positions can be lost entirely, and rules differ by country, so check local regulations on stablecoins and crypto before using any protocol.

The core idea of MakerDAO is intact: users lock collateral, mint a dollar-pegged token, and governance sets the rules. The label has changed. Sky is now the brand for the protocol, USDS and SKY are the newer tokens, and DAI and MKR remain in circulation with optional upgrade routes. Some interfaces, dashboards and third-party tools still use Maker terms, which can be confusing.

If you are deciding what to do next, a practical order is:

1. Learn the basics first. Understand collateral ratios, stability fees and liquidation before putting funds in.
2. Check live data. Look at the official dashboards for the current collateral mix, savings rate, stability fees and total DAI supply. These figures change often.
3. Read governance updates. The forum and recent executive votes show what is actually changing.
4. Start small. If you try a vault, use a small amount with a generous buffer.
5. Compare alternatives. Aave, Compound, Liquity V2 and SparkLend serve similar needs with different designs and trade-offs.
6. Decide whether to upgrade. Converting DAI to USDS or MKR to SKY is optional, so read the current documentation and understand any implications before moving.

MakerDAO matters because it showed that a decentralized, collateral-backed stablecoin could survive crashes, scale and adapt. Its history also shows the cost: constant governance decisions, growing reliance on off-chain assets and a design that has changed repeatedly. Treat any summary, including this one, as a starting point and confirm details at the source.