Growing in popularity is crypto-lending and borrowing. Such activities offer more easy and profitable ways to lend than traditional techniques. MakerDAO and its DAI crypto asset focus on lending and borrowing in the space. Stablecoins first.
MakerDAO is an Ethereum (ERC-20)-based (DeFi) platform that facilitates the DAI cryptocurrency. When users deposit a cryptocurrency, such as ethereum, into MakerDAO, DAI is produced. The goal is to establish a decentralized economy in which users may change their fiat currency into cryptocurrencies and also borrow and lend them.
Users are rewarded for keeping their DAI on the platform, which is then lent to borrowers. As a result, when the borrower repays the loan, the lender earns interest on the amount held. A portion of these rewards is allocated to the platform's development, while the remainder is distributed to the user.
MakerDAO has an additional coin, MKR. Within the platform, the latter is a governance token. Users who possess this token can take part in the governance process and deliberate on network upgrades and adjustments.
While most stablecoins are related to a physical asset's value, DAI crypto is a bit different. This stablecoin is created by locking ethereum and is not necessary backed by cash in a bank. Additionally, when locking in that ethereum, one must deposit 150% of the DAI they will really receive.
This additional investment is used to mitigate the effects of the crypto market's volatility. In the event that a borrower's DAI value decreases before they can repay the loan, the collateral is what covers the shortfall.
DAI crypto is Crypto-Collateralized due to ethereum backing. The ratio of DAI to ETH fluctuates, though it often hovers around 1.5 ETH to 1 DAI. Again, this ratio is intended to account for crypto market volatility.
What is the advantage of obtaining a loan from DAI as opposed to a bank? Well, because smart contracts eliminate the requirement for a third party, borrower interest rates are frequently lower. In a similar vein, more of this interest goes to the lender because there is no bank to deduct a fee.
Obtaining a loan through DAI is advantageous for both parties. The parties can agree on a variable interest rate for loan repayment, and the 150 percent ETH to DAI ratio effectively insures the lender.
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