---
# System prepended metadata

title: MAKER DAO DOCUMENTATION

---

# MAKER DAO DOCUMENTATION
### Important Terms: 
#### Maker Protocol:  aka (Multi-Collateral Dai (MCD)) (dapp): 

It allows users to generate Dai by leveraging collateral assets approved by “Maker Governance i.e (MKR holders).”

#### Maker Governance : 
It is the community organized and operated process of managing the various aspects of the Maker Protocol i.e (Dai stablecoin, Maker Collateral Vaults, Oracles, and Voting)

#### DAI  (coin):
Dai is a decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar.

#### Collateralized Debt Positions
Unique smart contracts that are used to generate Dai by  leveraging Ethereum (ETH) as collateral.

#### Executive Voting
#### Governance Polling

#### Collateral Assets:
* A collateral asset is a digital asset that MKR holders have voted to accept into the Protocol.
* To generate Dai, the Maker Protocol accepts as collateral any Ethereum-based asset that has been approved by MKR holders.
* Dai is generated, backed, and kept stable through collateral assets that are deposited into Maker Vaults on the Maker Protocol.
#### Maker Vaults 
* Maker Vaults facilitate the generation of Dai against locked-up collateral. Users open Vaults via the  user interfaces that allow management of Vault operations.
* Creating a Vault is not complicated, but generating Dai does create an obligation to repay the Dai, along with a Stability Fee, in order to withdraw the collateral leveraged and locked inside a Vault
* Users interact with Vaults and the Maker Protocol directly, and each user has complete and independent control over their deposited collateral as long the value of that collateral doesn’t fall below the required minimum level (the Liquidation Ratio
     #### Interacting with the Maker Vault:
     1. Create and Collateralize a Vault
     2. Generate Dai​ ​from​ ​the​ ​Collateralized​ ​Vault
     3. Pay Down​ ​the​ ​Debt​ ​and​ the Stability​ ​Fee
     4. Withdraw Collateral

####  Liquidation Ratio
* The Liquidation Ratio is the collateral-to-debt ratio at which a Vault becomes vulnerable to Liquidation. 
       
#### Liquidation of Risky Maker Vaults
        
* To ensure there is always enough collateral in the Maker Protocol to cover the value of all outstanding debt (the amount of Dai outstanding valued at the Target Price), any Maker Vault deemed too risky (according to parameters established by Maker Governance) is liquidated through automated Maker Protocol auctions.
* The Protocol makes the determination after comparing the Liquidation Ratio to the current collateral-to-debt ratio of a Vault. 

### Maker Protocol Auctions
The auction mechanisms of the Maker Protocol enable the system to liquidate Vaults even when price information for the collateral is unavailable.

* <b>Collateral Auction</b> - At the point of liquidation, the Maker Protocol takes the liquidated Vault collateral and subsequently sells it using an internal market-based auction mechanism  to collect outstanding Dai as well as the Liquidation Penalty 
* <b>Reverse Collateral Auction</b> -
*  Keepers bid in decreasing amounts of collateral they are willing to accept for a fixed amount of Dai. This process is part of the Collateral Auction and will only be initiated if there is enough initial interest in the collateral to cover the Vault's outstanding Dai. Once enough Dai is bid to cover those obligations, then the Reverse Collateral Auction kicks in.
*  Where a bidder bids on accepting smaller parts of the collateral for the fixed amount of Dai that covers the outstanding debt. The auction ends when the bid duration (ttl) has passed OR when the auction duration (tau)
*  <b>Debt  Auction</b> -
*   The winning bidder pays Dai for MKR to cover outstanding debt that Collateral Auctions haven’t been able to cover. MKR is minted by the system, thereby increasing the amount of MKR in circulation.
*   Debt Auctions are triggered when the system has Dai debt that has passed the specified debt limit.
*   This is a reverse auction, where Keepers bid on how little MKR they are willing to accept for the fixed Dai amount (lot) they have to pay at auction settlement. The auction ends when the bid duration (ttl) has passed OR when the auction duration (tau) has been reached.
*    <b>Surplus Auction</b> -
*    During a Surplus Auction, bidders compete by bidding increasing amounts of MKR to receive a fixed amount of Dai. Once the Surplus Auction has ended, the Maker Protocol autonomously destroys the MKR collected, thereby reducing the total MKR supply.

#### Make Buffers
* The Maker Buffer contains the Dai proceeds from the Collateral Auction (including liquidation penalties), as well as the Stability Fees accrued on Vaults.
*  When the amount of Dai in the Maker Buffer reaches a specific number (determined by Maker Governance) the surplus amount is put into a Surplus Auction and is used to buy and remove MKR from the total supply.
*   The surplus amount is net of system debts, such as outstanding Vault obligations in the Collateral Auction and DSR accruals.
*   ##### Dai proceeds from the Collateral Auction go into the Maker Buffer, which serves as a buffer against an increase of MKR overall supply that could result from future uncovered Collateral Auctions and the accrual of the Dai Savings Rate 

#### Auction Keepers:
* An Auction Keeper is a human or automated bot incentivized by the Maker Protocol to monitor the system and trigger liquidation when a Vault's Liquidation Ratio is breached.

#### Key External Actors:
Maker Protocol involves groups of external actors to maintain operations: Keepers, Oracles, and Global Settlers (Emergency Oracles), and Maker community members. 
1. Keepers:  
    *   A Keeper is an independent (usually automated) actor that is incentivized by arbitrage opportunities to provide liquidity in various aspects of a decentralized system. 
    *    They sell Dai when the market price is above the Target Price, and buy Dai when the market price is below the Target Price. 
    *    Keepers participate in Surplus Auctions, Debt Auctions, and Collateral Auctions when Maker Vaults are liquidated.




| Collateral Auction  | MakeBuffer| Debt Auction | MKR Minting|
| -------- | -------- | -------- |--------|
| Text     | Text     | Text     |










### Understanding Maker Protocol: 


##### How is Dai similar to  money:
1. Dai acts as a  as a Store of Value
2. Daiacts  as a Medium of Exchange
3. Dai acts  as a Unit of Account - standard measurement of value 
4. Dai acts as a Standard of Deferred Payment- used to settle debts within the Maker Protocol (e.g., users use Dai to pay the stability fee and close their Vaults