The evolution of decentralized finance (DeFi) has been marked by pivotal upgrades, and few have been as significant as MakerDAO’s transition to a multi-collateral system. This upgrade, known as the Multi-Collateral DAI (MCD), launched on November 18, 2019, and represented a major leap forward in DeFi scalability, flexibility, and governance. Built on Ethereum and powered by community-driven decision-making, MakerDAO continues to shape the future of decentralized lending and stablecoin innovation.
The Transition from SCD to MCD
Prior to November 2019, MakerDAO operated under the Single-Collateral DAI (SCD) model, where users could only generate the stablecoin SAI by locking up Ether (ETH) as collateral. With the activation of MCD, the platform expanded its collateral options, allowing users to generate DAI using multiple approved assets. This shift not only diversified risk but also increased capital efficiency across the DeFi ecosystem.
A key feature of the migration was the 1:1 swap mechanism—SAI holders could exchange their tokens for DAI seamlessly. While SAI remains in circulation, the long-term goal is for the community to vote on sunsetting the legacy system entirely, consolidating activity onto the more advanced MCD platform.
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Expanded Collateral and Governance Flexibility
One of the most transformative aspects of MCD is its support for multiple collateral types. At launch, WETH (Wrapped ETH) and BAT (Basic Attention Token) were among the first approved assets. The addition of BAT marked a milestone—it was the first non-ETH asset accepted through MakerDAO’s decentralized governance process, where MKR token holders vote on risk parameters and asset inclusion.
Despite BAT’s strong community support (99.82% approval), it wasn’t the top vote-getter initially. REP (Augur’s token) led early polls but was ultimately rejected due to concerns over upcoming protocol changes and price volatility. This highlights MakerDAO’s prudent approach to risk management—a core principle in maintaining DAI’s stability.
As of early 2020, WETH dominated collateral usage with over $355 million locked, compared to BAT’s $4.5 million. However, when adjusted for relative market caps, both assets showed similar lock-up ratios—1.8% for ETH and 1.5% for BAT—indicating proportional adoption.
MKR Tokenomics: Governance and Deflation
The MKR token plays a dual role: governance and system stability. Holders vote on critical parameters like collateral types, stability fees, and risk thresholds. Additionally, MKR is used to pay stability fees—interest charged on DAI loans. When paid, these MKR tokens are burned, creating a deflationary mechanism.
Originally issued at 1 million tokens, the supply has decreased to approximately 989,000 due to burns. Notably, the MCD migration triggered a spike in MKR destruction as users closed SCD positions and settled outstanding fees. This demonstrated the system’s self-correcting economic design.
Ownership of MKR remains concentrated: the top three addresses control 38% of the supply. These include:
- The MakerDAO Governance Contract (202,000 MKR)
- The Maker Team Multisig Wallet (117,000 MKR)
- Andreessen Horowitz (60,000 MKR), acquired at a 25% discount
This centralization raises ongoing discussions about decentralization and voting power distribution within the community.
CDP Insights: Debt, Liquidations, and Risk Management
Under SCD, over 154,000 Collateralized Debt Positions (CDPs) were created. As of early 2020, only about 19,609 had been closed—with 2,587 closed post-migration. One standout CDP (#3088) held 178,720 PETH as collateral and carried $8.28 million in outstanding SAI debt, accruing over $800,000 in unpaid stability fees.
Despite ETH’s price dropping over 30% between November and December 2019—from $183 to $122—system-wide liquidations remained manageable. Approximately 38,000 ETH were liquidated during this period, with the largest single-day event clearing nearly 19,405 PETH on November 22.
Interestingly, an average ETH price drop of just 7.2% was enough to trigger liquidations on high-leverage positions. Liquidation bots profited an estimated $170,000 from 3% auction discounts, though actual gains varied due to gas costs and oracle latency.
The average collateralization ratio across active CDPs exceeded 300%, far above the 150% minimum requirement. This suggests users are over-collateralizing as a hedge against volatility—a behavior that strengthens system resilience but ties up significant capital.
Migration Mechanics and Liquidity Dynamics
The smooth transition was enabled by the saiJoin contract, which temporarily held migrated SAI and facilitated debt portability from SCD to MCD. Nearly 97% of circulating SAI flowed into this contract during migration.
To maintain liquidity, over 38 million SAI were newly minted during this period—supporting deleveraging and repayment needs across platforms like Compound. However, activity slowed in the final two weeks, with SAI balances accumulating in the migration contract, signaling waning interest in further migration.
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The Lingering SAI Ecosystem
Despite progress, a notable portion of SAI remains in circulation—around 28.5 million SAI, held by just 100 addresses controlling 75% of the supply. Many of these are DeFi protocols like cSAI pools on Compound or exchanges such as Kyber and Uniswap.
Similarly, among the top 100 CDPs (representing 86% of total SAI debt), 30 showed zero activity during migration. These dormant positions collectively owe over **$1.15 million in unpaid stability fees**, including $800,000 from CDP #3088 alone.
Only about 20% of CDPs actively repaid fees or reduced debt—suggesting limited urgency to migrate. Some even increased their exposure by adding more ETH or minting additional SAI.
DAI Savings Rate (DSR): A New Monetary Policy Tool
MCD introduced the DAI Savings Rate (DSR)—a mechanism allowing DAI holders to earn interest by depositing into a smart contract. Unlike traditional lending markets, DSR carries no counterparty risk and offers a direct way to influence DAI demand.
After launching with a 2% rate, DSR increased to 4% in mid-December and later to 6%. The jump to 4% triggered a surge in adoption—especially after Compound began routing idle DAI into DSR. However, the increase to 6% did not yield further growth; in fact, DSR utilization declined in January as overall DAI supply grew by 45%, outpacing inflows into the savings rate.
This illustrates a key insight: interest rate sensitivity has limits in DeFi. Behavioral inertia, platform switching costs, and alternative yield opportunities all influence capital allocation.
Secondary Lending Markets Under Pressure
The introduction of DSR created strong competition for platforms like Compound and dYdX. As DSR offered a safer yield option, deposits on these platforms dropped significantly—dYdX saw an 80% decline in DAI deposits.
Today, secondary lending markets hold only about $22 million in outstanding DAI/SAI debt, just 15% of MakerDAO’s total stablecoin supply—down from 46% in September 2019. This shift reflects both DSR’s appeal and MakerDAO’s lower stability fees during migration.
On-Chain Activity and User Engagement
Active DAI addresses average around 2,000 per day, slightly below pre-migration SAI levels. A spike in SAI activity during mid-2019 was largely driven by Coinbase’s “Earn SAI” campaign, which skewed comparisons.
Nonetheless, consistent engagement with MCD—through CDP creation, DSR deposits, and governance voting—signals growing confidence in the multi-collateral model.
Frequently Asked Questions
Q: What is the difference between SAI and DAI?
A: SAI was issued under the Single-Collateral DAI (SCD) system and backed only by ETH. DAI is part of the Multi-Collateral DAI (MCD) system and can be backed by multiple approved assets like WETH and BAT.
Q: Can I still use SAI today?
A: Yes, SAI is still in circulation, but the MakerDAO community plans to eventually sunset it in favor of DAI due to improved functionality and security.
Q: How does the DAI Savings Rate (DSR) work?
A: Users deposit DAI into a smart contract to earn interest paid directly by the protocol. There’s no counterparty risk, making it one of the safest yield-generating tools in DeFi.
Q: Why did MKR get burned after the upgrade?
A: Stability fees on SCD positions are paid in MKR and then burned. The MCD migration prompted many users to close old CDPs, increasing fee payments and thus MKR burns.
Q: Is MakerDAO fully decentralized?
A: While governance is decentralized via MKR voting, token concentration among large holders means full decentralization is still a work in progress.
Q: What role do liquidations play in MakerDAO?
A: Liquidations protect the system when collateral values drop too low. They ensure debts are repaid through automated auctions and maintain DAI’s peg to the US dollar.
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