Sep 1, 2019
Earn More Dai Every Day
Yesterday a dear friend from the Philippines asked about being able to earn 10% interest on cryptocurrency. I am glad she asked. I want more people benefiting from developments in decentralized finance. This article explains how to start earning interest on Dai.
Dai is a cryptocurrency. It gained fame because of its stable value and decentralized nature. It is redeemable for one US dollar and, thanks to smart contracts and folks trading on margin, it also pays interest.
The easiest way to earn interest on Dai is to acquire and hold cDAI. cDAI is a token. It represents the right to the principal and any interest accrued on a quantity of loaned Dai.
Decentralized Lending
Financial markets are based on the concept that lending financial instruments (like dollars or pesos or even Dai) for any period should have value. That principle is called the time value of money and that value is called interest.
On platforms that facilitate decentralized lending (like Compound), this interest depends on how much demand there is for the underlying financial instrument. Presently, there is considerable demand for Dai as it is used in platforms like dYdX or Opyn that enable people to speculate, or put a hedge on their investments.
Compound algorithmically determines the interest rate on DAI and captures that additional value by issuing cDAI.
cDAI Gateway
The simplest way to get hands on some cDAI is to use Uniswap. Uniswap is a decentralized exchange. It is a cryptocurrency only exchange. So, Uniswap does not accept US dollars.
US dollars (or Philippine pesos) must first be exchanged for cryptocurrency. A gateway exchange is required to make that happen. A gateway exchange is used to convert US dollars (USD) into digital assets like bitcoin (BTC), Ether (ETH), or Dai (DAI).
Some day gateway exchanges will list cDAI as well. There will be no need to use Uniswap when they do. cDAI will be obtainable directly through the gateway exchange.
Until then, it is better to exchange US dollars for ETH (on a gateway exchange) and then ETH for cDAI (on Uniswap). Liquidity, a measure of market activity, is the major reason for doing it the reason for doing things this way. The cDAI / ETH market is the sixth-largest market on Uniswap. Transitioning from USD to cDAI with this progression will minimize fees. [1]
The other way to acquire cDai requires already owning cryptocurrency and opening a collateralized debt position (or CDP). This is the way to borrow Dai. Then cDAI can be obtained directly from the Compound financial market. Unfortunately, a complete novice needs more time to feel comfortable risking a highly volatile cryptocurrency (like ETH) to obtain Dai.
It is advisable to stay away from borrowing DAI at this incipient stage. Instead, go to Coinbase and use this link to open a new account. That link entitles you to $10 after your first purchase of $100 worth of ETH.
Navigating Uniswap
For total beginners, the easiest way to obtain cDAI via Uniswap is to download Coinbase Wallet (for iOS or Android) and link it to the newly established Coinbase account.
Redeeming Dai
Someday, the desire to use the value accumulated in cDAI will arise. cDAI will have to be converted into US dollars (or Philippine pesos) when that time comes.
The redemption process is the opposite of the acquisition process. The first step is to use Coinbase Wallet to convert cDAI to ETH via Uniswap. The ETH must then be transferred to the gateway exchange where ETH can be exchanged for USD. The last step required is withdrawing dollars (or pesos) to the bank account used to establish the Coinbase account.
Securing cDAI
The best way to hold cDAI is to put it in tamperproof cold storage. The D’CENT Biometric Wallet [2] conveniently holds cDAI since it supports all ERC-20 tokens. These wallets can be obtained on Amazon for $159.
That said, do not plan on acquiring huge sums of cDAI until the market for it matures. cDAI is not the most liquid asset. According to CoinGecko, about 4K dollars worth of cDAI trades each day.
Additionally, please know that holding interest-earning cDAI tokens securely in tamperproof cold storage (the D’CENT Biometric Hardware Wallet) does not eliminate every risk associated with lending DAI. Holding a cDAI token in a hardware wallet is riskier than holding a US dollar in an FDIC insured bank account.
That is because cDAI tokens are smart contracts. Smart contracts are code. Code tends to be buggy. Therefore, those precious funds are at risk. That said, cDAI presents an opportunity to earn interest on smaller amounts of idle cash. Acquire a small amount and start to experiment with the nascent, permissionless, decentralized revolution in finance.
Please leave questions or comments if this article was unclear or did not provide enough information for you to start earning interest on Dai. Otherwise, please clap for the article and share it with your friends so that we can grow decentralized money markets.
Lastly, check out this video by LoKey if time permits.
[1] UPDATE: While Uniswap provides the simplest interface for swapping ETH for cDAI, the Compound app presently provides the best exchange rate. If the Compound app is too intimidating, Totle’s Swap is very easy to use.
[2] D’CENT Wallets are made by IoTrust. I am the CMO of IoTrust and benefit financially from the sales of D’CENT Wallets. That said, please reach out to me on Twitter if you have a D’CENT Biometric Wallet and need assistance with acquiring cDAI and securely holding the asset in tamperproof cold storage.
