Did you know that with Maker DAO, the most important decentralized finance project of the whole ecosystem of block chains, you can freeze Ethereum and opt for a loan in DAI. DAI is a stable cryptomone that has its value tied to the dollar, this means that, you can freeze your Ethereum and take out a loan in dollars, by doing this, you are creating what is called a CDP (Collateralized Debt Position), which in Spanish is a Colateralized debt position.
This means that you have your dollars frozen as collateral and those dollars serve as support for the debt that you took out in DAI, where each of these is a dollar, as I told you, then that is a debt Collateralized, then with those DAI you can do whatever you want.
For example, some things you can do are:
- You can buy back another Ethereum and with them you can recreate a new CDP, i.e. freeze that Ether into another debt with another wallet address and create another Colateralized debt position and you have again other DAIs available, which are increasingly less of course, but increasing your exposure to Ether or the asset you want, you can also freeze Ethers with those DAIs and buy Bitcoins, but suppose you increase your exposure to Ether then you freeze Ethers, take out DAI, with them you buy Ether again, freeze it again, take out more DAI, that is, you can collateralize your Ether to create a debt and increase your exposure to the Ethereum price.
- Another thing that can serve is to buy in the fall, ie, if I do not have free funds at that time and most are falling can decide to buy in the fall, so I can collateralize an Ether, get DAI and with these buy Bitcoin, if my previous analysis says that BTC will go up or buy more Ether, which is very interesting.
Now, what happens if Ether goes up $10 from $100 assuming this is her current price, i.e. it goes up to $110, which would result in all your Collateralized debt positions going up 10%. If I hadn't collateralized and created these PDCs, I would only have my initial amount and your initial amount would have increased from 100% of $100 to $110 but as I do the process where I over-colateralize in Ethereum, all my collateralized positions go up 10% that means I am more exposed to a possible increase in the Ethereum price, the same with a fall.
Many say that this is compared to the so-called "Leverage Trading", but there is a crucial difference and this is that I am the absolute owner of the Ether that is collateralized, it is in one direction and this CDP Only I with my private key can unlock the CDP and recover those frozen Ethers, this is more like a mortgage where you take out a loan, but I still own the house I am mortgaging.
What if I want to take out my Ethereum?
To take out that Ethereum that is frozen in my CDP, I have to pay the debt I took out, that is, the amount of DAI I acquired plus an interest (percentage), that percentage is a little expensive, but because in the world of crypto currencies for now there are many variations in prices, these interests are now around 11% or 12.5% per year.
What is most innovative and interesting?
The interesting thing about this is that it works in a decentralized ecosystem with crypto currencies and with intelligent contracts there is no bank that takes care of the books, of keeping the accounts and of having the people's money and the loans, where for the collection of these, there is the system practically of replacement in Maker DAO, for intelligent contracts that run in a chain of blocks that works in nodes irrigated all over the world.
The revolutionary thing is that there is no intermediary bank and that these financial instruments are open to anyone, where commonly these financial assets from many countries are reserved for people with bank contacts and licenses.
What is DeFi?
This whole world of finance that is being born in the blockchain is known in English as DeFi (Decentralized Finance), is a clear use of this technology that goes beyond Bitcoin. Now the world of DeFi has around 500 billion dollars frozen in Ether, that is, there are several decentralized applications where Maker DAO is the largest, but there are many more that use Ethereum in some way or another as collateral or Pools of liquidity or other things.
What other Dapps work in a similar way?
There are other Dapps that work in the field of decentralized finance besides Maker DAO and they are the following ones:
Compound: Allows you to lend digital assets and charge interest on those loans.
Synthetix: Allows you to trade synthetic digital assets that are representations of other real-world assets, where you can also make financial transactions with this type of assets.
Uniswap: It proposes a decentralized exchange on some intelligent contracts that change the paradigm of what is an exchange in itself, since they replace this of the purchase orders and the sale orders with what is called liquidity pool in which one can participate and earn an interest.
This of the decentralized exchanges is of the most important thing that exists in the world of the crypto currencies since in a future these could replace Coinbase and Binance, for freer solutions where probably there are privacy crypto currencies that do not run the risk of being delisted.
In addition to Uniswap there are other options that experiment with new offers and new ways to generate a decentralized exchange or liquidity network between them are:
“Bancor, Kyber Network y 0x protocol” that I find very interesting and important that are developing the world of decentralized finance and obviously allows to generate decentralized exchanges as well as general liquidity.
If they want to participate with their crypto currencies with your Ethereum in any of these options you can use a tool called "DeFisaver" that helps you to see in a more didactic and friendly way your Maker DAO PDC and some other things.
The world of finance and blockchain is growing more and more, many innovations and systems that seek to replace the traditional economic models are being automated through disruptive and decentralized technology as is the Blockchain, we must only educate and learn to take new financial opportunities along the way that allow us to earn money.