One Easy Way to Increase Your Crypto Returns
The current financial system leaves a lot to be desired – that’s probably why there is such rabid support for some of the benefits that the blockchain industry hopes to bring to the world.
One of the most predatory parts of the system is lending. Stable and predictable loans are difficult to find and it makes it very hard to make large capital purchases. This is where MakerDAO comes in with an innovative new solution you can use to add lots more alpha to your portfolio. The mechanism is a little complex, so bear with me here.
Basically, MakerDAO runs using a proprietary stablecoin called Dai. To get a Dai loan, users must deposit a certain amount of ether as collateral. This is managed by a smart contract that is referred to as a collateralized debt position (CDP) by Dai. The goal here is to end usury-like operations and create a self-sufficient lending market. What this allows borrowers to do is put their ether up as collateral and then take the USD-pegged Dai and use it to make their purchase. What this allows users to do is retain possession of their asset while also investing (or making purchases) with the loaned funds. Therefore, the first money-making opportunity here is to leverage your Ether holdings to get some Dai and then trade or invest those funds as well. Assuming you’re bullish on Ether, this is a great way to get some extra returns.
The Potential Risks to Borrowers
You should be warned, however. Ether is a volatile asset and a price drop may leave users unable to back their Dai reserves. The way the platform is designed, if the market price drops, the ether that is acting as collateral is auctioned off to the highest bidder. As a result, users need to keep collateral in excess of the amount of Dai they are borrowing. Right now the minimum ETH:DAI ratio is 1.5, and if any contract falls below this minimum ratio is is sold off at a 3% discount, as well as being penalized a 13% liquidation fee. So obviously, as a borrower you would need to pay close attention to this (and there are solutions in the works to help monitor these swings). With 14% of all CDPs having been forcibly liquidated, there are a lot of borrowers who have taken a heavy loss on their Ethereum.
Picking Off Liquidations
There’s a second opportunity here. Basically, users can leverage their Ether stash to eke out extra returns, and if you’re ruthless enough, you can also benefit by picking off liquidating loans for cheap Ethereum. Collateralized in excess may sound insane, but it means you can hold your money and borrow money at the same time. You get to participate in the upside on one asset, while putting the DAI to an efficient use.
MakerDAO has the potential to completely change the lending industry by charging a fixed rate for loans (currently 7.5% as a one-time charge, rather than being time dependent). The additional benefit is that compared to the regular lending system, you’ll never have to entrust your money to a third-party. MakerDAO is decentralized and doesn’t come with the same centralized risk that other lenders demanding collateral might have. Most people who own ether do so because they believe in its high potential for price appreciation. So if you do own Ether, borrowing Dai may be an easy way for you to increase your profits. And if you want to own Ether, you should keep checking up on the liquidation market.
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