Publish0xTutorials: What to do with your DAI?

By bengy | Idle Musings | 16 Feb 2020


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So, you have just cashed out your BAT (Basic Attention Tokens) from Publish0x (or elsewhere) and they are now sitting in a wallet to which you hold your own private keys. What to do with them now, what do they do?

What is Dai?

 

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The first question that most people will have (unless you are relatively savvy already with cryptocurrencies and the in particular the Ethereum DeFi space, is "What is DAI"?

In short, 1 DAI represents a claim of 1 USD worth of ETH via the MakerDAo dApp at Oasis. Since DAI are created and issued using an overcollateralised loan based on ETH and BAT, the idea is that it maintains it's soft peg to the USD due to the fact that each DAI is fully backed by the corresponding basket of cryptocurrencies.

Needless to say, it is subtly different to the more familiar hard pegged stablecoins like USDT and USDC as it is not directly backed by physical USD. However, due to the more open nature of the Ethereum smart contracts (Vaults) that issue the DAI, it is easier to confirm that the collateral actually exists (in contrast to the hard backed stablecoins which require an accounting audit which is not as transparent).

So, with that soft-pegging to the USD comes a cryptocurrency that is inherently more stable, making for a much more useful token to spend on goods and services instead of the more volatile non-pegged cryptocurrencies.

DeFi

 

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Perhaps the most interesting use of the DAI stablecoin is in the Ethereum DeFi Space. With so many of the fiat currencies around the world suffering near zero or even negative interest rates on savings, the idea that you can get around 7 percent interest on a soft pegged DAI is pretty enticing. However, keep in mind that if you don't carry out most of your daily transactions and dealings in USD, there is the added complication of fiat exchange risk... in that you might be gaining in DAI (USD) but falling behind in the USD-->(Your local currency) exchange rate!

That said, this is the biggest problem for established strong fiat currencies like EUR, AUD, CND and various others. If your particular local currency is pretty weakly backed or unstable, then perhaps the USD/DAI system is a better option?

Anyway, the trick with the DeFi space is that, although smart contracts SHOULD be secure and hard to defeat and game, the sheer fact is that code is not infallible. Hacks or manipulation of smart contracts have happened and will continue to occur, which means that if you choose to enter a DeFi smart contract, keep in mind that the DAI is temporarily out of your control with no recourse to recover it if things go really badly!

So, with that in mind. I would only recommend some DeFi spaces that I personally trust and that have been around for quite a long time, had their code audited and are generally seen in high regard in the Ethereum community. Of course, there are many other places... but I would stick to the less risky areas... even if it means dropping a percentage point or two!

So, to begin with... you have the huge DeFi portals of Compound and dY/dX where you can add your DAI to a large liquidity pool that is meant for borrowing (you can also borrow against this contributed collateral if you wish as well...). Borrowers against this pool of DAI (and other Ethereum based cryptocurrencies) pay an interest rate which is distributed to the contributors of to the liquidity pool. Something that is quite interesting to the Compound dApp (and possibly dYdX, although I have less experience with that one) is that your liquidity share is represented in Ethereum tokens... which means that you are also able to trade and transfer your share of the liquidity pool without withdrawing the actual DAI!

Another liquidity pool that is interesting to join is Uniswap. The reason that I list this one apart from the previous two is the fact that you will be depositing ETH and DAI as a
liquidity pair, as Uniswap is based upon a Constant Product model. However, the principle essentially is the same, you receive pool tokens which represent your stake in the pool, and you collect the transaction fees of people that utilise the pool for borrowing. The interest and growth of your stake is a little harder to track due to the Constant Product model... so, I'm a little less keen to use this for DAI.

Finally, with the recent DAI upgrade (multi collateral upgrade from the single collateral SAI), the MakerDao ecosystem introduced a first party savings account. You can lock up your DAI at the Oasis portal for interest. This does generate less interest than Compound and dY/dX but more safety due to the fact that it is product that is offered by the issuers of the DAI coin (if they are willing to intervene in the case of a disaster!).

Spendable Currency

 

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The concept of a non-volatile (or at least a slightly less volatile one) cryptocurrency has a number of strengths over the existing fiat system and the more volatile cryptocurrencies that are aiming to be a Store of Value. Transparency and Censorship Resistance are key advantages of the blockchain based crypto curencies, and the lower volatility risk means that it is much more attractive for companies, individual and charities to accept as payment for goods and services.

On the charitable front, Unicef and Airbus are two projects that are harnessing the open and unblockable nature of DAI to accept donations for their charitable projects. The digital and decentralised nature of DAI makes it easier to transfer globally, and it also makes for an easier store of currency in areas where there is next to no banking infrastructure. So, you can put your DAI to work in supporting charitable work around the world!

On the individual front, it is possible to spend DAI at various decentralised marketplaces such as Origin Protocol and Open Sea. On these sites you can use DAI (which is accepted as a form of payment by individual creators) to purchase digital collectibles and other goods and services.

The biggest advantage of DAI is the low volatility nature of the token, which means that it is much more acceptable for companies and tax-declaring entities to accept as payment (also for individuals to accept as income!). Although there are still difficulties with the taxation status of DAI (and cryptocurrencies in general) in various nation states the fact that it can be quickly and easily exchanged for fiat and is a known value is a definite positive for the acceptance of this currency.

Conclusion

DAI is an interesting project that serves as a soft peg to the USD. It is one of the mainstays of the DeFi project on the Ethereum blockchain and due to it's lower volatility, it has found a niche as a store of value for projects that would otherwise find it difficult to accept other cryptocurrencies.

The biggest problem at the moment is mostly for people who have daily dealings in currencies other than USD. The soft-peg to the USD (via the ETH collateral) means that people in different currency regimes are subject to a great deal of foreign exchange risk, meaning that earnings denominated in USD might not actually transfer over to similar changes in the local currency.

 

Originally Published on my STEEM Blog!

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bengy
bengy

I am a Musician (Violinist/Violist) specialising in Early Music living in The Netherlands. I have a background in Mathematics and Physics due to an earlier tertiary level study... and so, I'm still quite interested in Science and Technology related stuff!


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