Multiple projects have been inaugurated in the past by various blockchain mediums such as Bitcoin, Ether, and XRP. These projects might be a stretch over introducing a new blend of services or products that are not yet being served within the crypto market or taking into account the overall problems the present businesses are facing. These projects might provide a dedicated solution to those or it could be a different approach altogether.
Introduction to MakerDAO
MakerDAO is a decentralized finance project having a crypto centralized stablecoin by the name of DAI which is pegged to the value of the U.S. dollar. The DAI community manages the coin with the help of a decentralized autonomous organization. Users are generating the coin by either staking their crypto into a perforated market with the respect to a specific liquidation ratio. The stablecoin in itself is over collateralized which means that any and all bumps or swirls that crypto sees in its prices would be accounted for eventually, but during all this, a dedicated stability fee would also be charged.
In the events of an uncertain market turn, your crypto would be liquidated right then and there and the proceeds will be used to recover any losses that the user has incurred, all of that would happen if the collateral drops significantly below the agreed-upon liquidation ratio. DAI is going to remain stable as MakerDAO is going to control the stability fee along with the DAI savings rate. The stability fee in turn affects the ups and downs of the stablecoin in itself.
The overall supply of DAI can be altered by changing the overall cost of minting new tokens. The demand for the coin is affected by the savings rate for DAI and it can also change the overall return on investment which the investors are applicable to when they stake their tokens. The DAI happens to have the same number of benefits as any other stablecoin or crypto asset out there.
You can easily transfer it globally, it can be used to make certain payments or you can lock the coin for the sake of turning a huge profit during a staking event or bonding your token for a dedicated amount of time. The DAI could also be used as a form of leverage and it could be invested into the DAI savings rate contract for earning a handsome profit in return. MKR Tokens are to be bought if a user wishes to participate within the governance-oriented polls and orchestrate voting on certain elements. Many fronts can be targeted with the help of executive voting and users can only take part in it if they have the MKR tokens with them.
Importance of MakerDAO Project
To be able to fully comprehend the importance of the MakerDAO project you have to bring into account stablecoins. These are extremely popular cryptocurrencies out there that are offering a middle ground between digital and traditional finance. If you don’t fully trust or comprehend the idea of digital finance such as the likes of Bitcoin, Ether, or other cryptocurrencies but you do want to have something efficient and speedier than traditional finance then stablecoins are the winner that you have been looking for all along.
Stablecoins present themselves as fiat currencies while they operate like crypto, they have a blockchain system just like any cryptocurrency out there but they are hugely centralized thus taking away the uncertainty that arises because of the decentralized nature of cryptocurrencies.
The largest market cap for stablecoins to this very date is Fiat backed, which says more about stablecoins as a trustworthy form of finance than decentralized cryptocurrencies. Stablecoins operate by having a supply of reserves that are going to back up the stablecoin in events of the crypto market taking a peculiar turn. There are some stablecoins that are crypto-backed and they have a huge following as well, we are going to talk about one such project by the name of MakerDAO shortly.
Market-Wide Approach of MakerDAO
MakerDAO is an Ether-based project which was launched back in December 2017. The primary focus of MakerDAO is to develop DAI, which is crypto collateralized stablecoin having its value pegged into the US dollar. It is not run by a group of developers or a single centralized entity therefore MakerDAO ecosystem brings into account the use of MKR governance token for the sake of executing multiple decisions for the project and accepting proposals as well. This governance model is actually known as the DAO or the decentralized autonomous organization.
you can access the MakerDAO with the help of the Oasis decentralized app. Upon signing up and getting to the main interface of the app you will have the full authority to create multiple collateral loans, take part in the governance-related assemblies, and manage the present wallets for yourself.
All these interactions primarily rely on the smart contracts and the autonomous execution of these along with the game theory that allows DAI to have a particularly stable value as compared to cryptocurrencies and decentralized tokens out there. DAI can be used for the sake of availing multiple benefits that come from fiat-backed stablecoins and the likes of them.
What is DAI?
If you fully want to comprehend what is taking place right here and want to explore the entirety of the MakerDAO network then you have to understand what its stablecoin DAI is. DAI is tied to the US dollar and it happens to be one of the largest stablecoins out there by market capitalization.
This ERC-20 token is not limited in terms of supply as Bitcoin and many other decentralized tokens are, as long as people continue to supply collateral into the MakerDAO network there can always be more tokens and vice versa. MakerDAO brings into account the use of crypto collateralization for the sake of maintaining its associated value with the US dollar rather than having a proportionated involvement of Fiat-oriented reserves.
It might be a little confusing how a cryptocurrency that is the very emblem of volatility can be used to provide backup for a stablecoin? To lift away from your tensions with this statement you need to understand that whenever a user deposits a certain amount of crypto into the project for the sake of developing DAI, it has much more promising value than the stablecoin which the user will be receiving at the end. It allows for extra room regarding the downward price movements when it comes to the crypto collector. DAI can lend you multiple benefits if used properly just as any other stablecoin out there would such as;
It will be much more appropriate to use DAI for covering the expenditures that require consistency or stability. Many retailers or vendors won’t be at home with receiving cryptocurrencies but you have all that stablecoin reserve and nowhere to spend it, wouldn’t it be a shame? that is where you can offer them DAI, a stablecoin having its value pegged into the US dollar that every vendor or merchant will accept without second-guessing. this will help in putting many concerns of the people regarding the volatility of cryptocurrencies as they change their value overnight because DAI being a decentralized autonomous organization project won’t.
DAI enjoys every benefit that a standard blockchain environment out there can. Being a stablecoin DAI is transferable without having the need to present yourself with a bank account when carrying out the transaction. Another benefit of the blockchain-oriented part of this stablecoin is that it is extremely secure and propose less risk or exposure to hacking or being swept away by a bad actor.
You can lock this stablecoin into multiple projects or payment accounts which allow you to stake your crypto or stablecoin in this specific entailing, where would continue to secure a huge amount of profit as the whole convention continues to be in profit. DAI will help you in offsetting the overall risk factor for your portfolio and it will provide you with many opportunities in the coming future to either enter or exit financial positions without having to risk yourself dealing in the traditional world of finance having no backup or security alliance with the blockchain world.
Crypto Collateral
You don’t need to hinge on cryptocurrencies for the sake of arguing or learning about collateral. It is an extremely common concept that is used apparently in traditional finance and you might have come across it before in your life as well. Collateral is pointed towards anything such as gold, money, or an asset that is kept or given to the lender as a surety over the loan that the receiver has procured. Should the receiver fail to properly pay their debt the collateral can be used by the lender for liquidations so that they can procure their assets which were earlier lent to the person to whom this collateral belongs.
First, we will be talking about Fiat collateral, which is a rudimentary concept in the field of traditional finance, and to be able to understand how crypto collateral works you must at first acclimate yourself to Fiat collateral. Suppose you have a gold watch and you are in dire need of money, you can’t obviously use your gold watch to pay for stuff such as paying for different products or services.
So what you do here is you find a pawn shop and place your gold watch as collateral to get some loan from the owners. They check out the quality of the watch and just how authentic it is and based on the findings they hand out a set loan amount to you plus an interest rate that is mutually agreed upon. To get your watch back you’d have to pay the loan in its entirety plus the interest or you would be giving away the rights of your gold watch to the owners so they can sell it in advance if you can’t pay your loan completely.
Collateral is nothing but a safety net that ensures that the lender is always in the gain no matter how the deal or the loan that they have given out turns out to be. The same concept can be applied to mortgages and car finance where you ask for a loan and the collateral is the very thing you are asking the loan for. Stablecoins that are backed by Fiat currency use Fiat currency as collateral.
It allows for a simple transaction where a user chips in their cash that works as collateral and in return they have the tokens provided to them. Now the user can return these tokens to get their collateral Fiat currency back but if they fail to do so the issuer or lender can still enjoy the collateral which is the Fiat money. This allows for arbitrage which keeps this stablecoin’s value pegged to a specific asset or entity.
On the other hand, stablecoins that have crypto as collateral like the DAI don’t do business with Fiat as they only prefer crypto. A smart contract is developed to orchestrate the transition and it takes care of these funds. You must be wondering that if the collateral is encrypted and the user gets a totally different stablecoin having its value pegged into the US dollar then how the exchange system works?
The smart contract has clear-cut instructions to issue the user the most present rate of whatever crypto they are offering to stake to get their hands at DAI. A smart contract is going to reach out to an authentic crypto exchange and then convert the value of the crypto provided by the user into U.S. dollars and similarly, an equivalent amount of stablecoins would be issued to the user, it might sound simpler on paper but in reality, it is much more complicated.
Is DAI Coin Stable?
It is an interesting question and being an investor you should be asking it upfront. Why does the value of DAI remain stable whereas every other stablecoin having its value pegged to a dedicated entity is taking the toll on the market at all possible times? The very answer to the question is the collateralized debt positions which allow for a reliable peg against a stronger entity with little to no fluctuations in price over the years. It sets a proper liquidation ratio which allows for a much smoother and more efficient exchange of one asset form to another.
MakerDAO, being the main network that orchestrates the DAI token has the authority to change the stability fee and the DAI savings rate which is the amount of interest paid to the user who has staked their token into a smart contract. This is done to manipulate the present supply and demand scenario for DAI. The overall value of 1 DAI token remains exactly $1, not even a cent above or below it.
Suppose in a scenario where DAI is dipping below the constant value which is $1, it provides the users with an opportunity to repay their debts because now the token itself has been reduced in value and they can save X amount of money in terms of dollars. By doing so they become eligible to get their collateral back and burn their DAI tokens at the end of the transition.
All of this can be done by increasing the stability fee slightly which is going to make borrowing more DAI tokens an expensive endeavor. The DAI savings rate could also be increased by the MakerDAO to ensure a subtle increase in the demand for the investment within the token. If a situation presents itself where the price of the DAI is above its normal pegged value which is $1 the opposite of the above-mentioned scenario is going to take place.
The stability fee would be lowered by the MakerDAO and an incentive to borrow more DAI tokens would be inaugurated. It will increase the present supply that is lowering the price. This is an incredibly smart system that has been put together and at a single glance, a financial expert could say that it is extremely complex, as it contains layers and layers over multiple constructs of numbers and code to ensure that each and every transition is handled professionally, efficiently and in a much more elegant manner.
If you are being tempted by what do you have read here and you want to invest your money or crypto-assets into the DAI then you can do so by all means. You just have to head over to authentic crypto exchange and ask for DAI. But you might have to complete your ‘know your customer’ and ‘anti-money laundering’ checks before you can start buying DAI or making a trade for it.
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