In December 2017, a Danish entrepreneur named Rune Christensen launched MakerDAO on the Ethereum blockchain. It was one of the most ambitious projects in crypto: a decentralized stablecoin that would maintain a $1 peg without needing any central company or bank reserves. The stablecoin was called Dai, and the mechanism that kept it stable was called the Maker Protocol.
The idea was elegant and counterintuitive. Instead of backing each stablecoin with a dollar in a bank, Dai would be backed by ether locked in smart contracts. Users could deposit ether into a “Collateralized Debt Position” (CDP) and borrow Dai against it. If ether’s price dropped, the CDP would need to be topped up or risk liquidation. This over-collateralization ensured that there was always more ether backing each Dai than the Dai was worth.
But how did this keep Dai at $1? Through a clever feedback mechanism. If Dai traded above $1, users would be incentivized to borrow more Dai (to sell for profit), increasing supply and pushing the price down. If Dai traded below $1, users would buy Dai to pay off their debts at a discount, decreasing supply and pushing the price up. The result was a stablecoin that tracked $1 reliably, without any central party needing to hold reserves.
MakerDAO introduced several concepts that would become foundational to DeFi. The idea of over-collateralized lending. The concept of liquidations as a stability mechanism. Governance tokens (MKR) that allowed holders to vote on protocol changes. These innovations would be copied and extended by dozens of later DeFi projects.
Dai has mostly held its $1 peg through many crypto crashes, including the devastating March 2020 “Black Thursday” when ether dropped 50% in a day. The protocol has evolved significantly, adding new collateral types beyond ether and building sophisticated risk management systems. MakerDAO proved that you could build real financial infrastructure on top of Ethereum without relying on traditional banks. It was the foundation for everything that came next in DeFi.
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