Decentralised Loans on Ethereum Blockchain (Way cheaper)
The world of blockchain and especially Ethereum is moving very fast. The next wave of Decentralized Loans is way more cheaper than traditional bank loans.
Anytime soon, are you planning to buy a house or a car on a bank loan? Think again.
How much does your bank charge you for loans?
Last time I remember, my father was charged 8.5% for a home and the house was kept as collateral. Also, it took few days to get the final bank approval for loan. Whereas personal loans are charged not less than 12% p.a. and please don’t ask me about credit card charges if defaulted.
What if I told you, that I can lock up my $10k, I have in Ether and get $5k back. In DOLLARS. Yes, in actual dollars with 0.5% charges in just few minutes. Completely decentralised. No middlemen.
I’m no way kidding. Let me draw a sketch.
Traditional Loan: Keep a house or something valuable as collateral with the bank. It takes few days to get your loan approved. Get the loan in fiat currency. You will be charged 8% to 12%, annually.
Decentralised Loan: Lock your ethereum in a smart contract as collateral. As soon as your transaction is added in Ethereum blockchain (which takes few minutes at most), you get the loan in USD pegged DAI Stable Coin on your ethereum address. You’ll be charged 0.5% whenever you pay back your loan.
It’s insanely cheap, fast and secured than traditional loans and believe me, no one can scam the system. Stakeholders are incentivised for securing the whole CDP ecosystem. For more technical details, consider reading this, this and this articles.
Remember, this is not any bank or institute. You’re interacting with smart contract code running on ethereum blockchain.
All you need is ethereum to keep as collateral and a light weighted client end like Metamask to interact with ethereum blockchain.
There’s no surprise why banks want cryptos to be banned. Every central power is afraid. Banks don’t want you to use Crypto for the same reason the television industry doesn’t want you to use Netflix and the postal service doesn’t want you to use email. Who wants to lose business after all? It’s that simple.
Who issued the loan (DAI Stable Coin)?
It’s created out of thin air on blockchain keeping your ethereum as collateral. It’s also known as Collateralized Debt Position (CDP). Pay back the issued DAI and unlock your Ethereum.
How DAI is pegged to USD?
Because the stakeholders are incentivised to stabilize price whenever DAI is above or below $1.
Some may ask why you need something like DAI at all. Doesn’t Tether already fulfill the purpose of a dollar-denominated token? Answer is that Tether, or any other centralized stablecoin, can be hacked, shutdown, or can steal your money, and is always operating at the whims of politics and human fallibility. Indeed, there is an enormous amount of speculation that Tether is operating fraudulently. Not-so with DAI. As a true decentralized stablecoin, you only need to trust the blockchain.
What if someone defaulted?
Your CDP will be wiped out when the Ethereum price dropped below a certain level. Stakeholders are incentivised for paying off your loan and sell the locked ethereum in open market. You get paid off the remaining amount.
You can keep the loan as long as you want with no additional charges. There’s no regulation for time based defaulting as there is no central party which can issue you the loan.
Recently, we open a CDP of 1.75 ether issuing a loan amount of $430 in a completely decentralised manner. Here’s the 2 Tx (this & this) of DAI stable coin which equates to $430 in total. Pretty amazing when you realize you just loaned yourself money!
Visit dai.makerdao.com to interact with the smart contract to open CDP and withdraw DAI. You must have Metamask installed on your browser.
I certainly agree that it’s a very complex process. Convert ETH to WETH to PETH, lock up in CDP, withdraw DAI and token allowance. But it’s worth it, saving you a lot of money by not paying interest for loan with no time limitations. Pay your debt anytime.
1 — (Stability Debt) That’s the issued loan in DAI.
2 — (Locked PETH) Ethereum locked in the CDP.
3 — (Ratio) The debt is back by 2.2x collateralized ether.
4 — (Liquidation Price) Liquidate the CDP if the ether price falls below $364.
5 — (Ether Price Feed) Current ether price.
You see, we locked up 1.75 ether and withdrew $430 DAI as loan. We can still withdraw $202 more DAI Coin (see above in the image — Avail DAI) but we prefer not to as it will also increase the risk of defaulting.
At max, you can withdraw 66% of the collateral ether price. When we did this 1.75 ether was priced around $830. Now let’s say if its increased to $1000 then we can withdraw more DAI as our collateralized assets are more valuable.
Similarly, you’ve to pay back the DAI (or lock more ether) before the loan amount equates the price of 66% of the total locked ether to save yourself from not paying penalties. I hope you got an idea of how this thing operates.
There are several important reasons why you would create DAI, despite the hassle:
- You need a loan, and have an asset (ETH) to use as collateral for your loan.
- You can use your CDP to buy ETH on margin.
- The demand for DAI has driven the price above $1 USD. Create DAI immediately and sell off open market. Free money.
These three reasons are enough to ensure that DAI is continually created. However, I’m interested in the 2nd reason. If you believe ETH is going up in value, invest ether from the DAI you created from CDP and then again follow the same process. Here’s a simple calculation. Let’s assume, ether is priced at $600:
- You locked up 1 ether in a CDP and withdrew 50% of the collateralized ether. You have: 1 ether (in CDP), $300 DAI and a loan of $300.
- Invest that DAI into ether. You have: 1 ether (in CDP), 0.5 ether in hand and $300 as loan.
Now, if the ether price is increased to $1000, your profits are $600 = 1.5 * $400 along with a stable loan of $300 DAI.
You’ll get the profits on 1.5 ether despite only 1 ether being indulged. In other words, you loaned yourself some DAI to buy additional 0.5 ether.
Same goes the other way so make sure you did this at price low’s or if you’re really into long run investing in ethereum or withdraw less than 50% DAI of the collateralized ether.
You can also continue the cycle by increasing your CDP with 0.5 ether and withdraw 50% more DAI. All this happens in completely decentralised manner without the interruption of any central power.
What if the ETH price crashes? Won’t the whole system fail?
As the value of ETH fell from $1,400 USD in January 2018 to $400 in April 2018, the DAI system’s incentive structure successfully kept the value of DAI pegged to $1 USD, which is an incredible accomplishment and proof that DAI succeeds even in a falling ETH environment.
DAI is a game changer because it allows USD to be transferred in any amount, instantly, across borders, without fees, without any interference. This enables a new era of commerce that exists purely within the blockchain and cannot be shutdown. A technology that shows off the unique capabilities of Ethereum and provides a solution that was 100% impossible before blockchain technology.
