Second entry on decentralized finance or DeFIs. We are going to talk about the beginnings of how it all started and why it is relevant.
It was very difficult to attract traditional investors and make use of the benefits that technology offers in terms of security, ease and speed of payments due to the high volatility of cryptocurrencies. Bitcoin, Ethereum, LiteCoin …
Therefore stable coins in price appear on the scene. They can be of various types, collateralized in dollars, gold, tangible goods or other cryptocurrencies. We can have stablecoins from central banks in an opaque way supported by dollars or, more faithful to the decentralized sentiment of blockchain, in a decentralized and totally transparent way.
If we have this tool and we know that its value in parity with the dollar remains 1: 1, that is to say always 1 cryptocurrency is worth € 1, the use cases have exploded and it has attracted many new players.
To see the difference, we can look at Tether (USDT), which is a stablecoin supported by dollar reserves and the most used. What happens is that it is centralized and we do not have all the information or its operation or that it is 100% backed by dollars.
At the other extreme we have Dai (DAI), a decentralized currency supported by the blocking of Ether (ETH) and Basic Attention Token (BAT), born a few months ago within the Maker platform.
How do we manage to keep the value of Dai at $ 1?
Maker is a smart contracts platform that works under the Ethereum network and autonomously, like a DAO with its own token. In this way, as in other projects, we have a protocol (rules) pre-established publicly, with the contracts audited by the community and a way of operating.
If you are a holder of the MKR token, you will have the right to vote within the platform, and from this system the Dai initiative was born. Dais rely on a system, as we have seen, of collateralization in the values of other cryptocurrencies to maintain their value. Depending on how many ETH or BAT users have blocked, so many DAIs are put into circulation to always maintain the price of 1DAI = $ 1.
- The ratios are 150% in ETH and in BAT.
- So if I want to release 100 DAIs, I need to enter $ 150 in ETH or BAT.
In this way we have a margin of volatility so that it is never destabilized, although as we have seen a few weeks ago with the brutal drop in ETH, the system was put at risk and they are already working to be able to collaterize the currency in other stable ones apart from the two that are already in operation.
We also have a stable fee of 8% and if we hold DAI, giving security to the system, we earn an interest of 7.50%.
This way of being able to generate DAIs in Maker is called CDP (secured debt position). As we have seen before, if the ETH price falls below 150% of the ratio, we must enter more ETH or we will be faced with a possible settlement plus a default penalty. Currently there are tools that allow you to change the collateral or simply close one position and open another to avoid this penalty.
This interest depends on the moment of the market, on the platform where you lend it and the price is not always the same in all markets, it always varies a little, so one of the business opportunities is in the arbitrage of the DEX (markets decentralized).
In the previous post we saw the reason for lending and being a borrower in a decentralized system like the ones that exist, the most famous are Maker, Compound and AAVE.
As always, the philosophy of these systems allows anyone to see the internal functioning of these systems, their smart contracts, we can make a copy and test.
What if we want to create our own stable currency? Our own lending system? Our own applications using base Maker, Compound or others?
This is where decentralized finance makes sense and many possibilities:
We have DEX of various types, atomic changes between erc20 tokens, social trading, insurance for smart contracts, streaming payments, lottery without losing your bet, stable price payments anywhere in the world, exchange of collateralized contracts … An infinity of options that we will see little by little.
If you have any questions, do not hesitate to contact us for any clarification or contribution.