A Three Minute Primer: MakerDAO’s Spark Protocol
MakerDAO’s fundamental operations center around the provision of lending and borrowing services. On the 9th of May 2023, MakerDAO launched its new lending platform_ Spark Protocol. It begs the question, ‘What is new?’. Before we delve into this, a brief overview of MakerDAO is in order.
What is MakerDAO?
The MakerDAO is a decentralised autonomous organisation that governs activities and general changes that might be introduced to the Maker Protocol. The Maker Protocol is a program encoded into the Ethereum Blockchain by MakerDAO developers. It allows users to generate stablecoin($DAI) by locking up collateral assets that have been approved by the MakerDAO community. Upon depositing collateral and generating DAI, a unique smart contract is triggered on the user’s behalf which monitors the value of the collateral against the generated DAI. This smart contract is referred to as a ‘Vault’. There is a ratio that must be maintained in the vault. If the ratio is threatened to the extent that the collateral’s worth diminishes against the DAI, a liquidation is triggered and the collateral asset is auctioned in exchange for DAI. After the auction, the worth of the borrowed DAI plus all outstanding fees (e.g. liquidation fees) are deducted and the balance is returned to the user. The DAI proceeds from this transaction are subsequently burned to control supply.
The MakerDAO Ecosystem makes use of two primary tokens: the MKR and DAI. The former is a governance token that MakerDAO community members must hold before being able to vote on proposals or on issues concerning the development of the protocol. DAI on the other hand is a stable coin offered by the protocol. It is an over-collateralized stablecoin pegged to the value of the dollar. By over-collateralized, it means that whoever wants to generate DAI would have to lock up collateral that is in excess of the worth of the DAI sought. Either this or you would have to buy DAI in exchanges. Any Ethereum-based digital asset can be offered up as collateral. However, the asset must have been prior approved by the MakerDAO community via governance. This is to ensure that very volatile assets don’t find their way into the collateral vaults. To redeem the collateral, you must return borrowed DAI tokens plus a stability fee.
Spark Protocol
Prior to Spark Protocol, users who wanted to generate or borrow DAI had to rely on third-party interfaces like Oasis or Instadapp. In essence, MakerDAO didn’t have a native front-end interface for users to generate DAI. With Spark Protocol, this has become a thing of the past. The first version of Spark is the ‘Spark Lend’. It exposes users to a wide array of options. Users can now borrow or supply ETH, Staked ETH (stETH), DAI, and Savings DAI(sDAI) at competitive rates. SDAI refers to DAI tokens that have been locked up for yield-bearing purposes in Maker’s DAI Saving Rate (DSR) module.
Spark Lend is connected with Maker’s Direct Deposit Module (D3M)
The D3M is a smart contract that establishes an interactive pathway between the Maker Protocol and third-party lending pools. The DssDirectDepositAaveDai for example is a smart contract of this module that enables the transaction of DAI tokens from Maker Protocol to the lending pool of Aave. With liquidity coming directly from Maker, interest rates on the Spark Protocol are competitively low.
Due to regulatory unclarity, Spark Protocol would be unavailable in the USA.
This post solely provides educational information and does not offer financial advice. By reading this article, you acknowledge and confirm the aforementioned statement. You are not being encouraged to make any financial decisions, nor are you receiving any implied assurance, promise, or suggestion of financial gains.
