To get a loan in 2023, you do not need to leave the comfort of your home or even scan your passport. All you need are cryptocurrency collateral and the decentralized MakerDAO platform. But MakerDAO loans differ from regular bank loans: your collateral should be at least 20% more than the loan you request. The use cases are also different: people do not use the MakerDAO loans when they lack money for a new car.
Let's learn more about the project, how it works, and the role of DAI stablecoin in its ecosystem.
What is Maker DAO and DAI
MakerDAO is a decentralized crypto project launched by Dane Rune Christensen in 2017. The platform gives users loans in the DAI stablecoin, which is backed by other cryptocurrencies, including Ethereum, USDT, and wBTC.
A stablecoin is a cryptocurrency with an exchange rate pegged to a fiat currency, often to the US dollar.
MakerDAO’s developers call their stablecoin the first fair currency in the world, as it can be issued by anyone, be it an ordinary user or a company. The truth is, Maker DAO is not available everywhere. There are countries where you may not be able to secure a loan even with a VPN. There is no specific list, but you can check the IDO (Initial Offering of DAI) whitelist.
DAI is an algorithmic stablecoin of the MakerDAO crypto project, with its value pegged to the US dollar. 1 DAI is equal to $1.
Algorithmic (or decentralised) stablecoins are autonomously regulated. The algorithms adjust the course, issuing more coins or, conversely, fewer. Centralized stablecoins work in a different way — their rate is maintained manually, involving the forced increase or decrease of the coin supply.
Learn more about stablecoins with our ultimate guide.
The DAI rate may fluctuate slightly depending on the market demand.
When DAI becomes oversold, its rate can drop below $1, like it did In March 2020 when the token fell to $0.97. High demand can push the price of DAI above $1, as seen in December 2020 when the rate reached $1.04.
MakerDAO also has another cryptocurrency — the MKR governance token. MKR holders decide whether to add new coins that Maker DAO can use as DAI collateral.
MakerDAO is very popular. As of October 25, 2023, it ranks fourth among largest projects in the decentralized finance (DeFi) sector in terms of the total volume of funds locked in it (TVL, or total value locked). TVL reflects the amount of assets locked as collateral in the MakerDAO protocol.
In terms of capitalization, the DAI stablecoin takes 14th place in the crypto market. By the end of October 2023, its market capitalization reached $5.3 billion, meaning that users have invested this sum in DAI coins.
How to borrow DAI on Maker DAO
To borrow a loan on Maker DAO, you need to issue DAI coins within the platform.
Maker DAO runs on Ethereum smart contracts, which are used to lock users’ cryptocurrencies and issue DAI tokens backed by these assets.
Smart contracts are digital analogues of regular contracts. When the parties have fulfilled their obligations, smart contracts automatically perform the specified operations. In the context of Maker DAO, these contacts lock or release the coins.
If you are in a region where Maker Dao operates, you can take out a DAI loan in just 5 steps:
Step 1. Go to the official Maker DAO website.
Step 2. Navigate to the “Use DAI” section.
Step 3. Click the “Borrow DAI” button.
Step 4. Connect your wallet and lock your cryptocurrency as collateral for the newly issued DAI tokens.
Step 5. Retrieve your DAI coins.
At this point, your coins are locked within the Maker DAO protocol. To unlock them, you need to return the DAI tokens.
You can store coins in any wallet that supports DAI. MetaMask is suitable, as it is convenient to use for daily spending. We have prepared a guide for you: find out how to create a MetaMask wallet for storing DAI.
Locking cryptocurrency within Marker DAO is not the only way to get coins. DAI can be purchased through the licensed exchanger itez with a fiat bank card.
How Maker DAO works
Maker DAO is based on three pillars: collateral, pools, and fees.
🪙 DAI can be backed by Ethereum and other ETH-based assets: USDC, MANA, LINK, and MATIC. The list is here. When you return DAI and withdraw your collateral, the issued DAI tokens burn.
The collateral for issuing DAI is always excessive — 20–75% more than the amount you want to borrow. It depends on its riskiness. The more volatile the collateral, the higher the interest rate.
💰 Coins for collateral are stored in pools, i.e. digital storage. Smart contracts are responsible for blocking and returning collateral to users.
The popularity of the collateral asset determines the number of pools. Different storage pools have their own requirements, ranging from 120% to 150%.
🍰 Maker DAO charges a stability fee to maintain a stable DAI rate. A higher stability fee encourages quicker loan repayment, while a lower fee provides greater incentives for new loans. Typically, the stability fee for issuing DAI secured by Ethereum is from 2 to 6%, but sometimes it can reach up to 50%.
Additionally, a platform fee applies uniformly across all pools. Maker DAO borrowing fees are dynamic and depend on the value of DAI. As of the end of October 2023, they stood at 5.52% per year.
How the Maker DAO algorithm ensures DAI stability
📈 When DAI’s rate drops below $1, the algorithm increases the stability fee and commission, provoking users to redeem their assets and repay their loans promptly. To repay the debt, users must buy back the required amount of DAI on the exchange. This increased demand drives the DAI rate back to $1.
📉 When DAI’s value surpasses $1, fees and commissions decrease, reducing the necessity to redeem DAI. However, the motivation for taking out loans and exchanging the stablecoin for other cryptocurrencies is growing. This devaluation of DAI is aimed to bring the value back down to $1.
How DAI helps you earn money
People take out loans on MakerDAO to earn money on two cryptocurrencies at the same time. This is exactly what hypothetical John decided to do at the beginning of September 2023.
🙋 The details: John has one Ethereum worth $1500. He believes that ETH will grow, so he does not want to sell it. Simultaneously, John finds a promising coin, let's say, it is JustAnotherCoin. However, he does not have extra money to buy it. One JustAnotherCoin costs $1000.
🔀 John decides to use Maker DAO: he blocks one Ethereum worth $1500 in an ETH pool with a collateral of 150% at 5.52% per annum, plus a 2% stability fee. The platform gives him 1000 DAI. John exchanges 1000 DAI for one JustAnotherCoin coin and waits.
🗓️ Two months have passed: JustAnotherCoin’s price has risen by 150%, and John’s $1000 in one coin turned into $2500. Ethereum also has grown by 17% up to $1800.
💸 All that remains to cash out profit is to repay the debt and make calculations: John sells the JustAnotherCoin coin for 2500 DAI, pays Maker DAO $1012 (initial $1000 + $12 fees), and takes his Ethereum back, the value of which has increased by $300. As a result, with the help of a loan on Maker DAO for September and October, John earned $1788!
Of course, this is a perfect scenario, and real-world results may differ. Do your own research before investing in cryptocurrency, especially in less-known projects.
By the way, loans are not the only tool Maker DAO is famous for. You can also earn money by depositing DAI in the pools, making 5% annual interest, as these coins are used by the protocol to fulfill loan requests from other users, with profits shared.
Is it worth borrowing from Maker DAO?
Maker DAO is one of the oldest DeFi projects, boasting the 4th place in terms of the total value of assets locked within DeFi projects. The DAI stablecoin’s capitalization is on the path to reach $6 billion.
Over the past six years of its existence, Maker DAO has been hacked several times. In March 2020, $8.3 million worth of cryptocurrency was withdrawn from Maker DAO, and $7 million in August 2021. The funds were returned to users, and the platform continued operating.
Maker DAO has proven its stability, but security issues still persist. Do not consider Maker DAO as a platform for long-term loans. You can try to make money on short-term ones and make a profit from two cryptocurrencies at the same time.
DAI can also be used as a usual dollar-pegged stablecoin, it is ideal for savings or daily payments. You can buy DAI with minimal fiat fees using a bank card through the itez exchanger.
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This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
