Decentralized finance (DeFi) has transformed how users interact with digital assets, and at the heart of this revolution lies MakerDAO—one of the most influential protocols on the Ethereum blockchain. Central to its functionality are several key tokens: DAI, WETH, PETH, SIN, and MKR. These tokens work in tandem with smart contracts to maintain stability, enable borrowing, and support governance.
In this comprehensive guide, we’ll break down each token’s role, how they flow within the MakerDAO ecosystem, and their broader implications in DeFi. Whether you're new to decentralized lending or looking to deepen your understanding, this article will clarify the mechanics behind these critical components.
Understanding MakerDAO’s Token Ecosystem
MakerDAO operates through a network of smart contracts and ERC-20 tokens designed to create a decentralized, collateral-backed stablecoin—DAI. The system ensures price stability by requiring over-collateralization of assets like Ethereum (ETH), managed via Collateralized Debt Positions (CDPs).
The following tokens play distinct roles in maintaining this balance:
- Unstable (Ether-like) Tokens: WETH, PETH
- Stable (DAI-like) Tokens: DAI, SIN
- Utility Token: MKR
Each token serves a specific function, from collateralization to debt settlement and protocol governance.
Unstable Tokens: WETH and PETH
WETH (Wrapped Ether)
WETH, or Wrapped Ether, is an ERC-20 representation of ETH. While ETH itself isn’t directly usable in many DeFi protocols due to technical limitations, WETH allows seamless integration across platforms that require ERC-20 compliance.
👉 Discover how wrapping ETH unlocks DeFi opportunities across leading platforms.
To use ETH as collateral in MakerDAO, users must first convert it into WETH. This conversion is a one-to-one swap and can be reversed at any time—though each transaction incurs gas fees.
WETH plays a vital role beyond MakerDAO:
- It powers trading pairs on decentralized exchanges (DEXs) like Uniswap and SushiSwap.
- It serves as a base asset for liquidity pools.
- It enables automated market maker (AMM) operations.
Data shows that MakerDAO’s SaiTub contract has historically held significant WETH balances, indicating widespread use for CDP creation. Additionally, WETH sees high activity on exchanges such as 0x and OasisDEX, reinforcing its status as a foundational DeFi asset.
PETH (Pooled Ether)
When users deposit WETH into the SaiTub smart contract, they receive PETH (Pooled Ether) in return. Unlike WETH, PETH does not maintain a fixed 1:1 ratio with ETH. Instead, its value is determined by:
PETH = WETH * (Total PETH Supply) / (WETH Balance in Contract)Over time, this ratio increases slightly due to the burning of PETH during debt liquidations—a mechanism that protects the system during undercollateralized events.
Key characteristics of PETH:
- Used exclusively within the MakerDAO ecosystem.
- Not tradable on DEXs.
- Acts as proof of proportional ownership in the pooled collateral.
Because PETH reflects collective risk and reward among CDP holders, early adopters benefited from appreciation relative to WETH—generating estimated profits of around 80,000 ETH during the system's growth phase.
Stable Tokens: DAI and SIN
DAI – The Decentralized Stablecoin
DAI is MakerDAO’s flagship product: a crypto-backed stablecoin soft-pegged to the US dollar. Users generate DAI by locking up collateral (like WETH) in a CDP. For example, depositing $150 worth of WETH might allow you to draw $100 in DAI, maintaining a 150% collateralization ratio.
DAI stands out because:
- It’s fully decentralized and not reliant on fiat reserves.
- Its stability is enforced algorithmically through incentives and penalties.
- It can be used freely across DeFi apps for lending, trading, or saving.
With billions minted and circulating across blockchains, DAI remains one of the most trusted stablecoins in the ecosystem.
👉 Learn how to generate and manage DAI using real-world collateral in DeFi.
SIN – The Cleared Debt Token
SIN represents cleared debt within the MakerDAO system. When a CDP becomes undercollateralized and is liquidated, SIN is issued to track the outstanding debt that has been settled through collateral seizure.
Though pegged in value to DAI (1 SIN ≈ 1 DAI), SIN is not used for transactions or payments. Instead, it functions as an internal accounting token during the debt auction process, ensuring transparency in how defaulted loans are resolved.
While largely invisible to end-users, SIN plays a crucial role in maintaining system solvency during market downturns.
Utility Token: MKR
MKR is the governance and utility token of the MakerDAO protocol. Holders of MKR have voting rights on critical decisions such as:
- Risk parameters
- Collateral types
- Stability fee adjustments
- Emergency shutdown procedures
Additionally, MKR is used to cover stability fees when users repay their DAI loans. These MKR tokens are then burned, reducing total supply—a deflationary mechanism that aligns long-term incentives with protocol health.
This dual role makes MKR both a governance instrument and a financial backstop:
- If the system runs a deficit (e.g., after severe liquidations), new MKR can be minted and sold to cover losses.
- Conversely, surplus revenue from fees leads to buybacks and burns.
As DeFi evolves, MKR continues to serve as a model for community-driven protocol management.
Smart Contracts Powering the System
Two core smart contracts facilitate most MakerDAO operations:
SaiTub
The SaiTub contract manages CDPs—the primary mechanism for generating DAI. It handles:
- Collateral deposits (WETH → PETH)
- DAI issuance
- Interest rate calculations
- Liquidation triggers
All user interactions with collateralized debt begin here.
SaiTap
The SaiTap contract enables debt clearance and profit extraction during liquidations. It allows keepers (automated bots) to purchase discounted collateral when CDPs fall below safe thresholds, stabilizing the system while earning arbitrage rewards.
Frequently Asked Questions (FAQ)
Q: What is the difference between WETH and PETH?
A: WETH is a 1:1 ERC-20 version of ETH used across DeFi. PETH represents a share of pooled collateral in MakerDAO and fluctuates in value based on system dynamics.
Q: Can I trade PETH on decentralized exchanges?
A: No. PETH is not listed on DEXs and exists solely within the MakerDAO ecosystem for internal accounting and risk distribution.
Q: How does DAI maintain its $1 peg?
A: Through over-collateralization, dynamic stability fees, and arbitrage mechanisms enforced by smart contracts and governance decisions.
Q: Is MKR used only for voting?
A: No. While MKR governs the protocol, it also acts as a recapitalization token—new MKR can be created to cover shortfalls, protecting DAI’s stability.
Q: What happens when a CDP gets liquidated?
A: The collateral is auctioned off via SaiTap. Debt is cleared using SIN tokens, and any shortfall may trigger MKR minting to cover losses.
Q: Why wrap ETH into WETH?
A: Most DeFi protocols require ERC-20 tokens for compatibility. Wrapping ETH enables participation in lending, borrowing, and trading without sacrificing ownership.
Final Thoughts
MakerDAO’s token architecture exemplifies the sophistication possible in decentralized systems. From WETH enabling access to DeFi to PETH managing shared risk, from DAI’s stability to MKR’s governance, each component plays a vital role in sustaining a trustless financial ecosystem.
As Ethereum continues to evolve and Layer 2 solutions expand scalability, MakerDAO remains at the forefront—proving that open, transparent finance is not only possible but sustainable.
👉 Explore how you can participate in decentralized lending and stablecoin generation today.