what is maker DAO
Maker DAO’s vision is to create better money. A digital currency that can be used by anyone, anywhere, anytime.
Maker DAO is a decentralized autonomous organisation within the Ethereum blockchain. Maker’s task is to reduce the volatility of the DAI stable coin. It allows people to experience financial freedom with little to no volatility.
You can compare it with a person going to a pawnshop for a loan. He just wants a short term loan to pay some bills. So deposits a gold watch as an insurance. If the debtor pays back his loan then he gets his watch back minus a small fee to the pawnshop.
The value that MakerDAO gives is to allow people to obtain loans without KYC or trusted parties, at an attractive rate and repayment terms. This is all done with a complete guarantee of security since everything is managed through smart-contracts.
Imagine the following situation. You have 1000$ worth of ETH. You need to pay a bill back that is 300$. You can either sell 300$ worth of ETH and pay this bill. But if you believe the price of ETH will increase in the meantime, you might not want to lose out on this profit.
That is why you can lock up the 1000$ worth of ETH in a Maker DAO cdp and with draw 300$ worth of DAI. This DAI can then be sold for ETH and then to fiat on an exchange.
There are two main advantages with this. First of all you can still benefit of having an asset that appreciates in value, second of all by not selling your ETH you will not be incurring any capital gain taxes.
- Investor locks up ETH by opening a multi colateralized debt position.
- He then receives a part of this debt in the form of a stable coin DAI
There is a minimum of 150% colateralization. But it is advised to have a higher colateralization
- This DAI is a stablecoin that follows the price of the USD thanks to the stability fee
- This DAI can be cashed out, turned into ETH or added back into the CDP contract to increase the collateralization.
How does DAI get created
An investor creates a new collateralized deposit smart contract called cdp. In this contract the investor deposits Ethereum which is swapped to pETH (pooled ETH)
An investor can lock up currency in a collateralized dept position. He then receives dai in exchange for the cryptocurrency he locks up.