A few months back Maker DAO released the first truly decentralized stablecoin, Dai, on the Ethereum mainnet. Dai is stabilized against the value of the U.S. Dollar through a decentralized governance system maintained by MKR holders.
The feat of building a decentralized stablecoin in and of itself is an amazing accomplishment but the potential that Dai now unlocks is the most fascinating part of the project. Here I will discuss Maker Dai CDPs, what they are and how you can use them to take out a very inexpensive loan using your crypto holdings.
First, what is a CDP? In short, Dai CDPs allow users to lock up Ether as collateral in order to draw out Dai which can then be used to trade crypto or convert to cash if needed. Currently, the yearly maintenance rate on a CDP is 0.5%, which is extremely cheap compared to traditional funding or current exchange lending rates.
There are some key terms to understand when opening a CDP.
- Maintenance Margin: This is the value of your locked ETH divided by the amount of Dai you’ve withdrawn from your CDP. The current minimum is 150%. This controls how much Dai you can withdrawal.
- Margin Call: Your CDP will be liquidated/forced closed if your maintenance margin slips below 150%.
- Liquidation Price: The price at which your CDP will be margin called if Ether drops to that price.
Now that we know some important terms, let’s assume you want some cash to buy some more ETH. You hold 1,000 ETH so decide to send 200 ETH to a CDP. At current prices you’d be locking up ~$95,000. Multiplying this by 0.66 (1/1.5) will give you the max amount you can withdrawal at the 150% maintenance rate ($62,700). However, I’d suggest sticking closer to 300% maintenance rate to avoid margin calls. In this example you could withdrawal (1/3) * $95,000 = $31,666 in Dai and send to an exchange for trading or withdrawal to cash for a cheap loan. If ETH price falls and your liquidation price gets closer, you can send more ETH to lock up in the CDP to lower your liquidation point. It’s very important to understand that opening a CDP can be risky given the highly volatile nature of ETH price.
So, how does one actually open a CDP? It’s rather easy and I’ll outline the main steps here:
- Navigate to https://dai.makerdao.com/
- Convert your ETH to WETH (ERC20 standard) in the “Wrap/Unwrap ETH” section of the dashboard.
- Convert your WETH to PETH in the “PETH” section of the dashboard.
- Now that you have PETH, the “Open Your CDP” button on the bottom left should become active.
- Once the CDP is created you should see it under the “My CDP” section. Here you will want to hit “lock” and send the amount of PETH you want to post as collateral.
- After the PETH is locked as collateral you can now “draw” Dai out of the CDP. This will show up in your account and you can now send Dai to exchanges to do what you wish with it.
- To increase the maintenance ratio, use the Wipe function to send Dai back to the CDP.
- To take collateral out of the CDP, use the Free button and withdrawal PETH from the CDP.
- Use the Shut function if you’d like to close out the CDP. Be sure to wipe (return) all DAI before this happens and pay the maintenance fee in MKR.
Congratulations, you’ve now taken out a 0.5% yearly loan with no intermediary.