How Does MakerDAO Work And How It Is Possible For Users To Loan Dai Money Themselves?
How Does MakerDAO Work And How It Is Possible For Users To Loan Money Themselves?
Mariano Conti, an Argentinian entrepreneur and the “Head of Oracles” at MakerDAO, explained that it is possible to take a loan using himself as collateral. MakerDAO is a Santa Cruz-based cryptocurrency startup that uses the stablecoin DAI and that has been expanding in the cryptocurrency market.
DAI is a stablecoin that was developed by Rune Christensen and other developers. This stablecoin are different than other virtual currencies since they were created with the intention of reducing price volatility.
There are different stablecoins that are backed with fiat currencies or other assets that are held by a company or institution. One of the most popular stablecoins in the market, Tether (USDT) is backed by US dollar-reserves held in a bank.
MakerDAO works in a different way. Steven Becker, the COO of MakerDAO, says that their virtual currency is a legally-backed crypto. According to him, relying on the legal system to maintain cryptocurrencies insert an unreliable middle-man into the blockchain. MakerDAO uses a Byzantine micro-economy that is built on top of Ethereum (ETH).
With MakerDAO it is possible to automatically transfer debt using smart contracts. After it, this generates a corresponding amount of Dai. In order to avoid problems with volatility and keep the price of the collateral, the smart contract auctions the collateral to the highest bidder. Thus, Dai’s peg is then returned in another currency.
In order to avoid being exposed to a large drop in the market, users would deposit a larger amount of collateral. This allows Dai tokens to remain backed at all times.
Preston Byrne, a critic of stablecoins in the market, wrote a blog post in 2017 in which he questioned the need for Dai holders’ Ether to be collateralized in excess. A user could just simply sell $50 of ETH and have the funds. However, he would not have digital assets back.
In terms of stability, Dai has performed in an acceptable way compared to other virtual currencies such as Tether or Gemini USD (GUSD).
Thus, Conti decided to put $30,000 worth of Ether into a smart contract and generate $10,000 worth of Dai. In this way, this ensured the dollar value of the Ether as it was when it was deposited. He was later able to cash Argentinian pesos out and purchase a car. In the end, he paid himself back after a few months saving.
About Argentina’s situation he commented:
“I come from Argentina. We do not like banks. We’ve been burned before. And just the idea of decentralization and transparency – that really goes a long way.”
During the whole process, he has never had to entrust his ether holdings to a third-party. Moreover, he owed money only to himself. Moreover, it was able to benefit from Ether’s value without having to dump them.