Distinction between how conventional fiat loans are issued and the way Dai token loans are issued
The Dai stablecoin is a decentralized, unbiased, crypto-backed crypto that’s pegged to the U.S.. greenback. Which means that every Dai token has roughly the identical worth as one greenback.
Because the cryptocurrency market is extremely risky, MakerDAO makes use of Dai to facilitate lending and borrowing. Furthermore, since Dai is steady, it determines lending charges and payable quantities.
If a consumer desires to borrow Dai, they are going to first must deposit ethereum tokens based mostly belongings accredited by the MakerDAO right into a Maker vault good contract. The good contract locks the crypto deposit and creates a collateralized debt place (CDP). The CDP ensures that any mortgage in opposition to your locked crypto tokens is all the time over collateralized. Usually, that is usually a 150% collateralized ratio.
So for those who deposited $1,000 in ether at a collateralization charge of 150%, the utmost you’ll obtain is $400 value of Dai tokens.
Not like many cryptocurrencies, the Dai token has a couple of properties that make it fairly just like cash:
- It’s a retailer of worth
- It’s a medium of change
- It’s an acceptable unit of account
- And a typical of deferred cost, that means it may be used to trace debt.
Maker vaults and collateral belongings
All accepted crypto-assets may be collateralized to generate Dai tokens within the Maker protocol by way of the market vault good contracts. These good contracts is deployed on a number of platforms such because the Oasis Borrow, Bitcointrade, Coinbase, Swissborg, and Buenbit, to say a couple of. Right here customers can create vaults and generate (mint) Dai tokens.
Producing Dai tokens creates an obligation that you’ll have to repay the Dai tokens and any stability charges that accrue earlier than withdrawing your capital locked within the vault.
Vaults are inherently non-custodial, that means that customers have complete management of their cash.
Interacting with a Maker vault
- Create and collateralize a vault by depositing and locking ethereum by way of one of many platforms talked about above.
- Generate Dai tokens out of your collateralized vault and switch them to your most well-liked digital pockets
- Spend your Dai tokens or save them on the Maker protocol to earn curiosity.
- To retrieve a portion or all of the collateral, pay down the debt and the steadiness charges. It’s essential to notice that the steadiness charges accrue over time and might solely be paid in Dai.
- With the Dai returned and the steadiness payment paid, now you can withdraw all or a few of your collateral again to their pockets.
Monetary perspective
Sustaining the steadiness of Dai stablecoin is the principle objective of the Maker protocol. That is completed by way of:
Dai worth stability mechanism
1 Dai = 1 USD, roughly.
However how is that this 1:1 ratio maintained?
Effectively, this boils right down to the Each day Financial savings Charge (DSR). The DSR is a variable accrual charge earned by locking in your Dai tokens in a DSR good contract. Its essential function is to permit the Maker governance to affect the worth of the Dai token by altering the demand and provide ratio of Dai tokens by way of a financial coverage.
When Dai token worth dips beneath the peg worth, the system makes it extra engaging for customers to shut their CDPs at decrease charges by repaying their debt. This reduces the provision of Dai tokens because the Dai tokens are burned creating an upward stress that pushes the Dai token costs up.
If the costs go above the peg worth, the system lowers the DSR, making it much less engaging to purchase Dai tokens and extra engaging to open CDPs. Because of this, the entire provide of Dai tokens generated will increase pushing the Dai token worth decrease.
Overcollateralization, collateralized debt place and day by day financial savings charge
Cryptocurrencies are very risky, and your funding right this moment could be value lower than 50% tomorrow. Cryptos like BTC and ETH usually see dips of as much as 50% throughout bear markets, whereas others like Dogecoin skilled dips of over 80%. In such instances, the principal may find yourself being lower than what was borrowed. This may be extraordinarily difficult and dangerous to crypto lenders. Not like gold and fiat currencies, most cryptocurrencies are usually not a great measure of debt reimbursement.
As we talked about above, to open a CDP place, your debt must be collateralized at a charge not lower than 150%. The fundamental concept behind that is that when debtors need to mint Dai stablecoins, they’ve to offer extra collateral than the quantity they are going to take out as Dai token debt. This fashion, even when the market dips, the place will nonetheless be coated.
You will need to word that if the collateral falls beneath 150%, customers incur a hefty penalty payment. Most customers usually prime up their collateral extra time to remain protected to forestall this.
If the collateral charge falls beneath 150%, the Maker protocol will begin to subsequently dump a number of the collateral utilizing an inside market-based public sale mechanism generally known as Collateral Public sale. The Dai tokens acquired from the public sale are used to cowl out the excellent debt to take care of a 150% collateralization charge.
