How Does MakerDAO Work?
MakerDAO (rebranding to Sky) is the original decentralized stablecoin protocol, issuing DAI/USDS against overcollateralized crypto and real-world asset collateral. With approximately $5.5 billion in TVL and $338 million in annual revenue (2025), it is one of DeFi's most established and revenue-generating protocols, operating since late 2017. Its B grade reflects the battle-tested CDP model with a clean post-Liquidations 2.0 track record, offset by material counterparty risk from RWA collateral, governance concentration, and the complexity of the ongoing Sky/Endgame transition.
TVL
$5.3B
Sector
CDP
Risk Grade
B-
Value Grade
B
Core Mechanisms
1.2.1
Maker Vault CDP — users deposit ETH/WBTC/RWA collateral and mint DAI/USDS stablecoin against it at minimum 150% collateralization ratio
The original CDP model, live since 2017. Hundreds of protocols have forked or replicated this pattern. Standard.
1.2.2
Maker Liquidation Engine (Liquidations 2.0) — Dutch auction liquidation of undercollateralized vaults with linear price decrease
Liquidations 2.0 replaced the original English auction system after Black Thursday. Dutch auction liquidation is now a standard DeFi pattern used by Aave, Compound, and others.
3.1.1
Maker Oracle Security Module (OSM) — 1-hour delayed price feed using whitelisted oracle providers, with Chainlink feeds as backstop
Custom oracle network with time delay is well-understood pattern. The OSM delay gives governance time to react to oracle manipulation. Chainlink integration added as industry-standard fallback.
5.1.1
MKR/SKY governance token — vote-escrowed governance controlling stability fees, collateral types, debt ceilings, and protocol parameters
Standard governance token pattern, one of the earliest in DeFi. MKR migrating to SKY at 1:24,000 ratio.
1.1.3
DAI Savings Rate (DSR) / Sky Savings Rate (SSR) — protocol-set yield on deposited DAI/USDS, funded by stability fees
Standard yield distribution mechanism. Protocol sets rate via governance; funded from lending revenue. Widely replicated pattern.
4.1.1
MKR burn/buyback mechanism — surplus stability fees used to buy and burn MKR (now SKY buybacks at ~$250K/day)
Buy-and-burn tokenomics standard since 2018. Governed by surplus buffer parameters. $102M+ deployed since Feb 2025.
1.3.1
Peg Stability Module (PSM) — fixed-rate swap between DAI/USDS and USDC/other stablecoins at near-1:1 with small fee
AMM-like stability mechanism for maintaining stablecoin peg. Standard pattern now used by multiple CDP protocols.
1.4.1
Real World Asset (RWA) vaults — institutional credit facilities and US Treasury positions serving as DAI/USDS collateral
RWA integration is now a recognized pattern in DeFi with multiple implementations (Centrifuge, Ondo, etc.). Maker pioneered it but the pattern has been replicated.
How the Pieces Interact
Oracle lag during extreme market volatility can delay liquidations, allowing undercollateralized positions to persist and creating bad debt. Proven in Black Thursday 2020 where 1-hour OSM delay combined with network congestion resulted in zero-bid auctions.
Governance can modify critical vault parameters (stability fees, debt ceilings, liquidation ratios) in ways that affect existing vault holders. Concentrated governance voting power among few entities amplifies this risk.
Heavy reliance on centralized stablecoins (USDC) in PSM and RWA custodians introduces correlated counterparty risk. A USDC depeg or custodian failure would simultaneously stress both the PSM reserves and RWA collateral backing.
If governance sets the savings rate too high to attract deposits, it can consume fee revenue that would otherwise fund MKR/SKY buybacks, creating a sustainability tension between growth incentives and tokenomics.
Dutch auction liquidations depend on accurate and timely price data from the OSM. If oracle updates are delayed or manipulated, auction starting prices may be mispriced, leading to either insufficient liquidation proceeds or unnecessary liquidations.
What Could Go Wrong
- Oracle-dependent liquidation system: Maker relies on a custom oracle module (Medianizer/OSM with 1-hour delay) feeding ETH and other collateral prices. During Black Thursday (March 2020), oracle lag combined with network congestion led to $8.3M in zero-bid liquidation auctions. The system has since been rebuilt with Liquidations 2.0 (Dutch auction format) and Chainlink integration, substantially mitigating but not eliminating oracle-related liquidation risk.
- RWA and centralized collateral exposure: A significant portion of DAI/USDS backing now comes from real-world assets (US Treasuries, institutional loans) and centralized stablecoins (USDC). This introduces counterparty risk with regulated custodians and potential jurisdictional shutdown risk, though it also provides stability and revenue diversification.
- Governance concentration risk: The MKR/SKY governance token has high insider allocation (~70% to founders/project at genesis), and recent rebranding votes showed only four entities accounting for most voting power. This concentration could enable parameter changes that disadvantage minority holders or DAI/USDS users.
- Endgame complexity and migration risk: The ongoing Sky rebrand and Endgame restructuring introduces SubDAO complexity, token migration (MKR to SKY at 1:24,000), and new stablecoin mechanics (USDS). Migration risk and user confusion during the transition period could fragment liquidity or create arbitrage edge cases.
RWA Counterparty Cascade and USDS Depeg
ModerateTrigger: A major RWA custodian or counterparty (holding >$500M in Maker collateral) becomes insolvent, is sanctioned, or freezes assets, while USDC simultaneously depegs >2% due to correlated financial stress.
- 1.RWA counterparty freeze or default on obligations backing Maker vaults — A significant portion of DAI/USDS backing becomes illiquid or impaired, reducing the protocol's effective collateralization ratio
- 2.PSM reserves (primarily USDC) come under stress simultaneously due to correlated TradFi contagion — The Peg Stability Module cannot absorb DAI/USDS redemption pressure at par, and arbitrageurs cannot profitably defend the peg
- 3.DAI/USDS begins trading below $0.98 on secondary markets — Vault holders rush to repay cheap DAI/USDS debt and withdraw collateral, creating a bank-run dynamic. DSR/SSR depositors exit.
- 4.MKR/SKY emergency minting triggered to recapitalize the system — Dilutive MKR/SKY emissions crash the governance token price, reducing the protocol's recapitalization capacity and governance credibility
- 5.Confidence crisis in the largest decentralized stablecoin triggers DeFi-wide deleveraging — Protocols using DAI/USDS as collateral (Aave, Compound, Curve) face cascading liquidations across the ecosystem
Risk Profile at a Glance
Overall: B- (29/100)
Lower score = safer