MakerDAO is a decentralised loaning and lending decentralised autonomous organisation (DAO). It is built on the Ethereum blockchain and makes use of 2 native tokens: MKR and DAI.
The MKR token is the native token used for governance and other system correspondence, while DAI is the stablecoin which is generated through collateralisation and used for the majority of the services on the platform.
MakerDAO makes the process of collecting loans easy by simply creating a vault and placing an equivalent or more of the amount you wish to loan as a collateral and then you receive your loan in DAI or any other stable coin.
Any Ethereum based token can be accepted, however, currently the only approved token used as collateral is ETH. This is until another token is selected through voting. Voting is done by the users who hold the MKR token and voting weight is determined by the amount of tokens being held.
MakerDAO Collateralized Debt Positions (CDPs) #
MakerDAO works through a smart contract on the Ethereum blockchain that helps stabilise the DAI token. The system used for this is called Collateralized Debt Positions (CDP). Digital assets, in this case ETH, are locked inside the CDP.
The CDP is then deposited, and DAI is generated. When the loaned DAI is returned, the CDP is then released. However, if the DAI is not repaid, the CDP gets liquidated. It is sold in order to generate the exact amount of DAI that was loaned.
Oasis.app #
The Oasis platform is used to perform all MakerDAO loan and lending features. It allows users to easily interact with the Maker protocol and provides 3 major features; trade, borrow and save. Although Oasis.app is a very convenient platform and it has limited functions. It can be accessed through https://oasis.app/borrow
First you have to connect a wallet, then open your vault, select a collateral and then generate DAI by depositing ETH into the vault.You can then see your DAI generated on your MetaMask wallet.
Using the MakerDAO CDP Vault #
To create a CDP vault, you would first of all need to visit the MakerDAO CDP portal. The first screen looks like this:
The next step is to connect your wallet. The options available are Metamask and other hardware wallets like Trezor, Ledger Nano, etc.
After successfully connecting to your account, you will then be directed to the CDP portal where you can then open CDP.
Taking loans on MakerDAO #
Haven connected your wallet to the platform and directed to the CDP portal, the next step would be to open CDP and deposit ETH tokens in order to generate DAI.
The amount of ETH you deposit must be equal in value to the amount of DAI you want to generate and after the DAI has been generated, your CDP portal will look like this:
As stated previously, the DAI generated is dependent on the amount of ETH locked within the CDP. The ETH cannot be unlocked until the DAI loaned out is returned. However, in a situation where the ETH lock is affected by volatility and drops below 150% of the collateralization ratio, it is automatically liquidated.
To prevent this, it is advised that the moment a user observes the value of their ETH drop significantly, it’s important to deposit more ETH into the system to prevent liquidation.
Compounding DAI #
DAI can either be loaned and converted to satisfy a need or it can be compounded on the system and used to generate more tokens. Now that the DAI has been generated, to compound it, you can navigate to the Compound option and begin using Compound after accepting the Terms of Service.
After that, you would need to connect to MetaMask again.
The next step would be to supply DAI and approve DAI on Metamask. Although other crypto assets can be used for compounding, DAI has the best APR.
And finally, you can now supply DAI into the Compound Protocol.
After confirming one last MataMask transaction, you can now begin to earn an interest on the DAI supplied and also have control of your ETH locked in the CDP. This is one way to earn some passive income.
Should you use MakerDAO? #
There are many risks attached to this project. However, almost every cryptocurrency related project comes with said risks. The risk of losing funds due to volatility and also changes that may occur due to supply and demand.
The decision to buy into a project like this has to be made after considering these risk factors and following the general rules of crypto investing: Don’t invest more than you are willing to lose.
Thanks to the compounding feature, the generation of DAI tokens can yield some remarkable profits. However, there are still the downsides like liquidation due to a 150% fall in collateralization ratio and others.
Conclusion. #
MakerDAO is a Decentralised Autonomous Organisation built on the Ethereum blockchain that permits taking loans and borrowing of cryptocurrency. It works through the collateralization of Ether and the generation of DAI, a stablecoin.
DAI can either be generated through Oasis.app or the MakerDAO CDP Portal, and after this short tutorial, the process of taking a loan and compounding on MakerDAO should be easy to understand and perform on both platforms.
References:
https://medium.com/coinmonks/how-to-borrow-using-makerdao-22a7329dbc1a
https://www.finder.com/makerdao
https://media.consensys.net/how-to-open-a-makerdao-cdp-and-earn-interest-on-compound-a-walkthrough-guide-b9e9f9584000
https://medium.datadriveninvestor.com/open-finance-a-simple-guide-to-using-makerdao-and-compound-dafd4c0c30f0
