How to Open a MakerDAO Vault and Earn Interest on Compound—A Walkthrough Guide
How to use decentralize finance protocols to increase interest from your cryptoasset holdings.
This article will show you how to put Dai stablecoins into the Compound protocol in order to earn interest on your cryptoassets. There are two ways you can obtain DAI. The first is by purchasing it on an exchange and the second is by opening a MakerDAO collateralized debt position (CDP). Today, I’m going to show you how to obtain Dai by opening a Maker CDP and then I’ll walk through how to put your Dai into the Compound protocol.
Why do I need to open a Maker CDP?
Technically, you don’t have to open a Maker CDP to use Compound. If you wanted to only use the Compound protocol, you could very easily purchase DAI and then go straight to Compound. However, to do this you’d have to convert your ether (ETH) into Dai, thereby losing the potential upside of your ether appreciating in value.
For an introduction to the Dai stablecoin, I recommend watching this short video.
So now that you know what we are doing and why, let’s go step by step through the process.
Step 1: Getting Started
First, you will need to go to the MakerDAO CDP portal. You’ll be greeted with the following login screen.
Step 2: Connect Your Wallet
Connect MetaMask or your hardware wallet (Ledger or Trezor) to get access to the Collateralized Debt Position Portal. MetaMask is the easiest way to connect and is available for free.
After you sign in (make sure you’re connected to the Main Ethereum Network) you’ll be taken to the CDP portal.
Step 3: Opening a CDP
Click open and you’ll be directed to the next window.
Next, you’ll need to deposit some ether that you have in your Metmask account. If you don’t have ether in your account, you’ll need to buy some on an exchange and send it to your MetaMask account. You’ll also need to decide how much Dai you would like to generate.
How much DAI should I generate?
Well, that depends on your risk appetite. The Maker CDP uses ether as collateral for the borrowing of Dai. Therefore, the more ether you put into a CDP, the more Dai that you can generate. Your ether remains locked in the CDP until you pay back the amount of borrowed Dai plus an additional one-time fee.
You can input the amount of ether you wish to lock in a CDP and the website will calculate how much Dai the CDP is able to generate. It will also show you the price point that the Maker protocol will automatically sell your ether at, also known as the liquidation price.
Alternatively stated, if your amount of ether drops below 150% collateralization ratio on the amount of DAI you have generated then your CDP will be liquidated, charging you a 13% liquidation penalty fee and then return the remaining ether. So if you placed 1 ETH in a CDP at the price of $162/ETH, the CDP will automatically liquidate if ETH drops below $89.
Therefore, it’s recommended that you keep a relatively high collateralization ratio of at least 250%. If you see your CDP dropping significantly, it might be necessary to deposit more ether into your CDP to prevent liquidation.
So, decide how much Dai you want and click generate. Lastly, you will need to accept the terms and conditions before finalizing the creation of your CDP.
After a few minutes, your CDP will be created and you will be directed back to the CDP portal.
Step 4: Maintaining your CDP
Congrats! You have a CDP and now you must maintain that CDP in order to prevent liquidation. You have the ability to deposit or withdraw ether as well as generate more Dai. However, remember to take into account the collateralization ratio.
If you wish to close your CDP, payback the original amount of Dai generated and swallow the 14.5% stability fee.
Step 5: Setting up Compound
Now that you have your Dai in your MetaMask or hardware wallet, navigate over to Compound.
We all like bright colors. Click the shiny blue (maybe cyan) button.
Accept the terms and conditions.
Step 6: Connect to MetaMask Again
Once again, you’ll be prompted to connect your MetaMask account. Click connect and you’re almost home free.
Step 7: Supply The Dai
In the future, this menu will display your available supply and borrow balances. While Compound accepts various cryptoassets, Dai is the only asset with a good APR.
Click Dai and the website will direct to the following screen.
Before supplying Dai to Compound, the site will require you to enable Dai stablecoins in your MetaMask wallet.
Confirm the transaction on MetaMask. Note you will lose a very, very small amount of Dai for the gas fee.
Once enabled, you’ll be able to supply Dai to the Compound protocol.
If you don’t have any funds (Dai) available you’ll receive the above window. If you do have Dai in your wallet then you’ll be able to supply your Dai to the protocol.
Input the amount of Dai you wish to earn interest on and confirm one last MetaMask transaction. Now you’ll start earning interest on the DAI you’ve supplied while maintaining control of your ether. Congrats, now you’re money is working for you!
Important Notes
- This is risky. You are purchasing ETH and obtaining Dai stablecoins which are both risky assets. On top of that, you’re also trusting that the MakerDAO system executes properly, that Dai remains stable, and that every line of code is error-free. Those are some risks that you should evaluate in your decision making.
- The Compound protocol rate changes with supply and demand. While 5% is a good rate compared to other typical passive investments, I’ve seen the rate as low as 2% which may not justify the risk.
- If you keep a low collateralization ratio in your Maker CDP then your increasing the likelihood that your CDP will be liquidated. Ether, the collateral you’re using is volatile and, therefore, is subject to sudden market price movements. If it drops too low and you’re unable to add more to your CDP in time, then you’ll take a hefty fee for liquidation.
- Don’t risk money you’re unwilling to completely lose. Seems obvious, but always worth noting.
Decentralized finance is an incredible opportunity to bring financial inclusion to millions of individuals around the world. It’s by no means perfect and will likely experience challenges along the way. However, decentralized financial applications present a unique model for obtaining loans and managing financial assets.
If you have questions or think we missed something please reach out or comment below!
Mason Nystrom, ConsenSys
Disclaimer. The views, information, and opinions expressed are solely those by the author above do not necessarily represent the views of Consensys AG. They are meant for informational purposes only, are not intended to serve as a recommendation or investment advice to buy or sell any securities, cryptoassets, or other financial products. Any reference in this article to any person, organization, activity, products, or services does not constitute an endorsement or recommendation of ConsenSys. This article does not constitute legal or other professional advice or services. ConsenSys is a decentralized community with ConsenSys Media being a platform for members to freely express their diverse ideas and perspectives. To learn more about ConsenSys, Ethereum & Blockchain, please visit our website.
