Popular digital assets such as Bitcoin and Ethereum are too volatile to replace cash as a settlement tool. Bitcoin’s price change can reach 30% in a single day, and in a month, volatility can be as high as 300%.
Fiat-backed stablecoins seemed to be a solution, but one may not call them truly decentralized. They are rather tokens, providing the right to demand fiat currency from centralized storage.
The MakerDAO project stands out in this case, offering a more transparent model for stablecoins. This article is a continuation of the material about Defi, and this time we will elaborate on what Maker and DAI are, on their advantages and disadvantages, and most importantly, how to capitalize on this project.
What is MakerDAO
MakerDAO is an Ethereum blockchain smart contract platform. The project’s objective is to provide a stable cryptocurrency. The stability is achieved by utilizing DAI — the ERC-20 standard token, which is a cryptocurrency backed by a collateral asset. The cost of DAI is relatively stable against the US dollar.
The Maker platform allows anyone to use their Ethereum cryptocurrency funds to create Dai cryptocurrencies. After generating Dai, the tokens can be used the same way as any other cryptocurrency: they may freely send Dai to other users, use them as payment for goods and services or store them as savings.
The DAI issuing scheme is similar to the one of issuing money secured by gold. In essence, the only difference is that in this case, Ethereum is used as collateral: the user sends a certain amount of ETH to the smart contract, which issues DAI tokens. This type of smart contract is called Collateralized Debt Position (CDP). Thus, the created DAI tokens represent a pledged debt to MakerDAO. One may draw another analogy with fiat money, which is a debt to the central bank; the difference is that any user can create money with MakerDAO, no obstacles. At the same time, smart contracts guarantee that only money, secured by ETH can be created.
The main feature of the MakerDAO platform is a two-coin system. In addition to the DAI stablecoin, there is a Maker utility token.
The primary function of the Maker token is to facilitate voting on the basic functioning and security parameters of the entire MakerDAO platform, for example, risk management and the business logic of the platform.
Key DAI Applications
As mentioned before, the volatility and lack of transparency of some cryptocurrencies is an obstacle to the development of certain industries, for example:
- Gambling. Predicting the event’s outcome, one does not need to deal with the cryptocurrency rate change. Such predictions become especially risky when they are long term. The number of the user’s coins may increase, yet if the underlying asset’s value has fallen in terms of USD, all the profits get mitigated due to such a depreciation.
- Cross-border transfers. Instant money transfers with almost zero commission, trusting the centralized stablecoin’s issuer is not required.
- Transparent accounting system. Cryptocurrency volatility is a severe obstacle for charitable foundations. Thanks to DAI, donating can be transparent, while the funds are protected from rate fluctuations.
DAI is an ideal tool for decentralized trading as well.
When a user makes a deposit to a centralized exchange, he is no longer in full control of his funds. The same can be said about centralized stablecoins as the cryptocurrency user must trust the issuer. Decentralized exchanges (DEX’s) allow you to solve the trust problem, and DAI allows you to trust mathematics and smart contracts, instead of centralized issuers.
For example, a user believes that Ethereum will rise in price. He has two options: deposit funds to a centralized exchange, buy Ethereum and withdraw it to his personal address (safety first), or visit a decentralized exchange and exchange DAI for Ethereum directly from his own wallet.
Additionally, when using DEX and DAI, there is a possibility of arbitrage or purchasing at prices lower than on centralized exchanges.
As we can see, at a given point in time, the price difference between the ETH/USDT (the best offer on Binance) and the ETH/DAI on DEX’s reaches approximately 2.5% in favor of decentralized exchanges.
Decentralized margin trading
Another case for DAI is the ability to trade with leverage. The maintenance of the Bitmex exchange during the fall of BTC to $3,700 and numerous order cancellations at Binance Futures could encourage users to look for new margin trading platforms, where they would not be told when to trade and which order to place.
The dYdX decentralized crypto derivatives exchange eliminates the problems mentioned above, allowing users to trade derivatives using smart contracts without constant supervision by third parties.
MakerDAO and its two tokens system eliminate the need for excessive trust in centralized systems not consistent with Satoshi’s ideas. An opportunity to make money with familiar financial instruments, such as arbitrage and margin trading, is a nice bonus for those who are just discovering DeFi and MakerDAO. However, one should keep in mind that MakerDAO is a young platform, even by the cryptocurrency standards, and for an untrained user, understanding the principles of DAI, Maker, and DeFi applications can be challenging.