The MakerDAO system is a complex ecosystem comprising multiple smart contracts—such as Sai Tap, Sai Tub, Vox, and Medianiser—and several ERC-20 tokens. Together, these elements work to maintain the stability of the DAI stablecoin. This article delves into the roles, functions, and interactions of these tokens within the MakerDAO protocol.
Understanding Token Flow and Smart Contracts
In the MakerDAO ecosystem, tokens circulate through various smart contracts, enabling conversions between different forms of value. Tokens are represented as circular nodes, while smart contracts and their entities appear as rounded rectangles. Arrows indicate the methods within these contracts that allow users to convert balances from one token to another.
For instance, calling the join() function will deduct WETH tokens from your balance and credit you with a corresponding amount of PETH tokens.
Ether-Like Tokens: Volatile Assets
The left side of the token flow diagram highlights tokens closely tied to Ether's value, which are inherently volatile.
ETH
Ether (ETH) itself is not directly used within the MakerDAO system. To participate, users must first convert their ETH into Wrapped ETH (WETH), an ERC-20 token.
WETH (Wrapped ETH)
WETH is a one-to-one representation of ETH, compliant with the ERC-20 standard. Users can freely convert between ETH and WETH, though each conversion requires gas fees. WETH facilitates interactions with decentralized applications (dApps) and exchanges that require ERC-20 tokens.
PETH (Pooled Ether)
When users deposit WETH into MakerDAO, they receive PETH tokens. Unlike WETH, PETH does not maintain a strict one-to-one ratio with ETH. Its exchange rate is dynamically calculated based on the total PETH supply and the WETH balance in the system.
DAI-Like Tokens: Stable Assets
These tokens are designed to maintain stability, closely pegged to the US dollar.
DAI
DAI is MakerDAO's stablecoin, algorithmically stabilized to remain near $1. It is generated when users create loans against their collateralized debt positions (CDPs).
SIN
SIN represents liquidated debt within the system. Each SIN token holds a value equivalent to 1 DAI and is used exclusively during debt liquidation processes instead of DAI.
Utility Token: MKR
MKR is the governance and utility token of the MakerDAO ecosystem. It is used to pay stability fees when users repay their DAI loans (via the wipe method). MKR holders also participate in governance decisions, such as adjusting risk parameters and system upgrades.
Key Smart Contracts
Sai Tub
This smart contract manages the collateralized debt position (CDP) system. Users lock PETH as collateral to generate DAI loans. Most operational activities within MakerDAO, such as depositing collateral and drawing DAI, occur through Sai Tub.
Sai Tap
Sai Tap handles debt liquidation processes, ensuring system solvency by managing collateral auctions and generating profits from liquidations.
Common Smart Contract Methods
MakerDAO's smart contracts offer numerous methods for token operations, primarily involving the tokens listed above. CDPs are internal entities within Sai Tub. For a detailed illustrated guide on these transactions, refer to external resources on MakerDAO operations.
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Token Utilization Patterns
Analysis based on blockchain data provides insights into how these tokens are used in practice. The following sections examine each token's flow and holder behavior.
WETH (Wrapped Ether)
WETH serves as a bridge for using ETH in ERC-20 compatible environments, especially decentralized exchanges (DEXs). Launched alongside MakerDAO in December 2017, WETH's largest holder is often the MakerDAO Sai Tub contract, where users lock WETH to create CDPs.
Chart data indicates that locked WETH volumes peaked at over 2 million ETH, with total creation exceeding 4 million ETH. Unique address counts on Sai Tub reveal growing user engagement, though locking and releasing activities have shown symmetric trends with occasional shifts.
Beyond MakerDAO, WETH is actively traded on DEXs like Oasis and DDEX, with major trading pairs including WETH/DAI. Token flow tools highlight key hubs for WETH: MakerDAO's Sai Tub, various DEXs, and relayers like ZeroX.
PETH (Pooled Ether)
PETH represents pooled ETH collateral within MakerDAO. Its exchange rate with WETH fluctuates based on system events, such as debt liquidations, currently around 1.04. This rate variation has generated annual percentage yields (APY) for early users, with total profits estimated near 80,000 ETH.
PETH is not traded on DEXs and primarily circulates between Sai Tub and Sai Tap during liquidations. Its flow is mostly internal, reinforcing its role as infrastructure within MakerDAO.
Frequently Asked Questions
What is the purpose of WETH?
WETH allows Ethereum users to interact with ERC-20 based protocols, such as decentralized exchanges, by wrapping their ETH into a compatible token format. This enables seamless trading and lending activities.
How is DAI stabilized?
DAI maintains its peg through collateralized debt positions (CDPs), where users lock excess collateral (like PETH) to generate DAI. Algorithmic adjustments and governance by MKR holders help regulate supply and demand.
Can PETH be traded externally?
No, PETH is an internal token within MakerDAO, used solely for representing pooled collateral. It is not listed on external exchanges and cannot be traded directly.
What happens during debt liquidation?
If a CDP's collateral ratio falls below the required threshold, the position is liquidated. Sai Tap auctioneers the collateral for DAI or SIN tokens, ensuring system solvency.
Why use MKR tokens?
MKR serves dual purposes: paying stability fees on DAI loans and enabling governance participation. Holders vote on critical system parameters, influencing risk management and upgrades.
How is the PETH/WETH rate determined?
The rate is calculated as PETH = WETH × (Total PETH supply) / (WETH balance). It changes due to events like liquidations, where PETH is burned to cover bad debt.
Conclusion
MakerDAO's token ecosystem is a finely tuned mechanism for decentralized stablecoin generation. Understanding the roles of DAI, WETH, PETH, SIN, and MKR is essential for navigating DeFi strategies effectively. Each token plays a pivotal part in maintaining stability, facilitating collateralization, and enabling governance.
In the next part, we will delve deeper into DAI, MKR, and SIN tokens, exploring their circulation, holder behavior, and economic impacts. Stay tuned for advanced insights into MakerDAO's operational dynamics.