Cryptocurrency lending and borrowing is growing in popularity. Such activities provide users with more convenient ways to lend than using traditional methods — and with more profits too. In this guide, we’re going to discuss MakerDAO and its DAI crypto asset, which happens to focus on lending and borrowing within the space. But first, let’s discuss stablecoins.
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Stablecoins are cryptocurrencies tied to a fiat currency, often the U.S. Dollar. Tether (USDT) is one such example of a stablecoin, which is linked to the dollar. These assets make it easier for traders to participate in the crypto network of their choice.
DAI is a stablecoin as well, and features in the MakerDAO protocol. DAI differs a little from other stablecoins, however. Let’s examine how exactly it is different from competing stablecoins.
What is MakerDAO?
MakerDAO is an Ethereum-based (ERC-20) decentralized finance (DeFi) platform that facilitates the DAI crypto. When users lock up a currency, such as ethereum, into MakerDAO, it generates DAI. The idea is to create a decentralized economy where users can convert their fiat to crypto, while also borrowing and loaning said money.
Users are incentivized to hold their DAI on the platform, which is then lent out to borrowers. As a result, lenders earn interest on their holdings once the borrower pays it back. Some of those rewards go toward the platform’s development, while the rest is paid out to the user.
MakerDAO features another token as well, MKR. The latter is a governance token within the platform. Users who hold this token can participate in the governance process, and deliberate on changes and upgrades made to the network.
What are MakerDAO CDPs?
If you browse the MakerDAO website, you might see that the platform supports something called a collateralized debt position (CDP). A CDP is a smart contract in which the user locks in ether to generate and borrow DAI.
DeFi and DAOs
Decentralized finance is essentially traditional financial applications, such as lending and borrowing apps, powered by the blockchain. Considering the blockchain omits the need for a third party, how do we make sure everyone on the network follows the rules? We utilize a Decentralized Autonomous Organization (DAO).
Upon the creation of a blockchain platform, developers create a set of rules hard-coded into the network. In no way can those rules be broken, and since they’re built into the network, a DAO removes the possibility of human error when enforcing rules.
To facilitate network changes and upgrades, users vote on proposals which are then implemented by the DAO. As mentioned previously, voters hold the MKR token to participate in this governance method.
How is DAI different from USDT?
While most stablecoins are tied to the value of a physical asset, DAI crypto is a little different. This stablecoin is generated by locking in ethereum, and isn’t necessarily backed by dollars sitting in a bank. Also, when locking in that ethereum, one must invest 150% of the DAI they’ll actually receive.
That extra investment is used to counter the effects of volatility in the crypto market. After all, if a borrower has a certain value in DAI, and that value is to drop before they can pay it back, the collateral is what covers the difference.
Why is DAI “crypto-collateralized?”
DAI crypto is Crypto-Collateralized because it’s backed by ethereum. The ratio in which DAI converts to ETH varies, though it’s usually hovering around 1.5 ETH to 1 DAI. Again, this ratio is to cover any volatility within the crypto market.
Why use DAI?
What’s the point in using DAI for a loan instead of taking one out at a bank? Well, thanks to smart contracts replacing the need for a third-party, interest rates are often lower for the borrower. In that same vein, more of that interest goes toward the lender, as there’s no bank to take a cut of the earned funds.
Utilizing DAI for a loan is beneficial for both parties. The two can decide on a variable interest rate in which to repay the loan, and a lender is essentially insured by the 150% ETH to DAI ratio.
How to use DAI
Using DAI is fairly easy. A few exchanges support the asset, but you’re best off heading to the platform’s official Oasis decentralized exchange. There, you can acquire a DAI loan utilizing various ERC-20 assets as collateral.
How to choose a DAI wallet
There are all sorts of wallets that support the DAI crypto. The one you choose depends entirely on your desired level of security. For example, you can pick a hardware wallet like Trezor or Ledger for offline (cold) storage. Or, you can choose to store your DAI on a supported exchange like Coinbase, or simply in a web wallet like MetaMask.
Is DAI a good investment?
Many experts would claim that DAI crypto is a good investment. After all, the project is planning to build a massive DeFi ecosystem. As crypto becomes more mainstream, it’s possible DAI might be the project that takes off. Plus, if you can hold enough DAI to earn reasonable interest while lending, it might be worth considering.