Decentralized loans on the blockchain

Dai — the stablecoin

The world of blockchain and especially Ethereum is moving very fast. So fast that by the time you finish reading this sentence, a bot will have liquidated someones collateral from a Collateralized Debt Position (CDP) that he used to buy a car cheaper than getting a traditional loan. Way cheaper.

Welcome to the most complex financial(?) instrument ever created: the CDP (or if you prefer, the Dai stablecoin).

It will take us a couple of hours to go through why the Dai is awesome, how it works, what is MKR etc and I have many other epic articles to write so I just hope I can just send you to the right direction and do your own research. If everything fails, ping me on twitter.

Having said that, cryptocurrencies are very risky and the Dai is a very complex coin that could crash and burn, along with your dreams. So, treat it very carefully, experiment only with money that you can afford to lose and read, read, read.

Always be skeptical of a bull (market)

Let’s get down to business. Let’s say that I have $100k in Ether. Good times. I am not planning to sell them any time soon because I believe Ethereum will be $100,000,000 in 2018. Seriously though, who are these idiots that make these predictions every day and disappear when everything crashes? Ok, back to our thing.

What if I told you, that I can lock up my $100k that I have in Ether and get $50k back in DOLLARS. Yes, in actual dollars.

The conversion of course won’t be seamless but the idea is that at the end, you are going to have $100k in Ethereum locked up somewhere (hint: in the blockchain, in a smart contract you silly!) and you have $50k to go and have fun!

These are fantastic news for people that are holding (I am not going to say hodl!) as they can use their (borrowed) money to invest in other opportunities. Here are some ideas:

1. Use the borrowed money to give loans to people in need through Kiva (I love this)
2. Buy more Ether! Hooray for leverage!
3. Use Lending Club and write an algorithm that creates a diversified portfolio of loans and create steady income (post coming soon). That means that your locked up Ether is generating you passive income
4. Buy things (a car, a phone, a house!) and start repaying your debt at your own time instead of paying 4% and monthly payments
5. Put them in the stock market (like in AgentRisk)

This sounds too good to be true and of course there are same major concerns (other than the stability of CDPs and DAI). First of all, everything is awesome as long as Ethereum is stable or going up. If it crashes (depending how much you put in the collateral), your whole Ethereum which is locked up is gone. Yeap, gone. That means that you got $50k but you lost your $100k that you had in Ethereum. Ouch.

So, why I am discussing about CDPs and DAI if it sucks so much? First of all, the whole concept is amazing and it saddens me that people only care about the price of cryptos. The field is amazing (game theory, crypto-economics etc) and personally I am fascinated about how Ethereum is trying to solve problems using social (and smart) contracts than stupid-burn-all-the-energy solutions (I am looking at you Bitcoin).

Secondly, if you take into accounts all the risks involved, it makes sense in same cases to use CDPs to put your Ethereum in use.

This post just scratches the surface of what CDPs are but I believe it gives you an idea what you can do with them. Just be careful as one of those risks is getting broke :)

What, still here? I love it! Thanks for reading and here are some more interesting facts!

1. 1 Dai = $1 and it will never go up or down. Ok, at least the idea is that there are some social dynamics that try to keep it at that price. Very interesting whitepaper
2. There was another coin, that tried the same (1 coin = $1) but they went the old fashion way, meaning they needed to have as many $ in the bank as coins and that’s didn’t work out in the end (especially for the investors)
3. Even-though I am full-time dedicated in helping people manage their wealth, I spent tons of time talking about trading, algorithms and Ethereum on my blog and in various events in L.A. Ping me and we can geek out!