Helping the average John guy understand the Defi space: stablecoins and Maker edition

DECENTRALIZED STABLECOINS : For the moment, John is showing interest for USDT(Tether) and Dai(DAI). WATCH OUT TRUSTING USDT JOHNNNN, as they work with the motto: "trust me bro".

Lets help John understand those 2 stablecoins :

Tether (USDT) aims to always be worth $1 by having $1 in the bank for each USDT token it creates. But it's centralized, meaning you have to trust them to actually have that money in the bank. It's like giving someone $20 and hoping they'll give it back to you.

DAI (DAI), on the other hand, keeps its value at $1 by using cryptocurrencies like Ethereum as collateral. It's decentralized, meaning there's a system in place that everyone can check to make sure there's enough collateral for all the DAI tokens. It's like if you borrowed $20 from a friend, but your friend left their watch with you until you paid them back. You can always see the watch, so you know your friend will get their money. DAI is like the popular money in the world of DeFi. It's what people like to use for buying, lending, and other financial stuff in the DeFi world. To learn more about DAI, let's talk about the platform it comes from, called Maker.

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John asked us what is Maker. This is the explanation that he received:

Maker is a smart-contract platform that runs on the Ethereum blockchain and has two tokens: DAI (both algorithmically pegged to $1) and its governance token—Maker (MKR).

Dai (DAI) started in November 2019 and is also called Multi-Collateral DAI. It's not just backed by one thing; it's like a mix of different assets, including Ether (ETH), Basic Attention Token (BAT), USDC, and Wrapped Bitcoin (wBTC). They keep adding more types of stuff to back it up, depending on what people suggest.

Maker (MKR) is like the boss token for Maker. People who have it can vote on making Maker better through something called Maker Improvement Proposals. Maker is a special kind of organization called a Decentralized Autonomous Organization (DAO).

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What are the differences between SAI and DAI, John asked. Here is your answer John:

Maker started with something called Single Collateral DAI (SAI) in December 2017. It was made using only Ether (ETH) as the backup. Then, on November 18, 2019, they introduced Multi-Collateral DAI (DAI), which could be made using either Ether (ETH) or Basic Attention Token (BAT) as backup.

In March 2020, Maker added another backup called USDC to deal with problems like not having enough money and DAI's price going crazy during a crash. Right now, people can suggest adding new types of backup at MakerDAO's forum, and the community decides if it's a good idea.

To sum it up: Single Collateral DAI = Old DAI = SAI Multi-Collateral DAI = New DAI = DAI SAI is gone now, and Multi-Collateral DAI is what Maker uses.

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Next, John does not understand how does Maker govern the system. Here is how:

Maker is like a club where people who have Maker tokens (MKR) get to vote on how things work. The more tokens you have, the more your vote counts.

They vote on three important things for the DAI money:

1. Collateral Ratio: This decides how much DAI can be made. For example, if you want to make $100 in DAI, you need to put in at least $150 worth of other stuff like Wrapped Bitcoin or Basic Attention Token as backup.
2. Stability Fee: This is like interest you pay when you borrow DAI. The fee changes based on what MKR token owners decide. They listen to people who check how risky the backup stuff is. For example, right now, if you borrow DAI with BAT as backup, you pay a 6.0% fee.
3. DAI Savings Rate (DSR): This is like a tiny reward for keeping DAI. It's also used to make people want more DAI. Right now, the DSR is set at 0.01%.

So, MKR token owners vote to make sure everything stays safe and DAI stays close to $1.

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"Why would you want to lock up a higher value of collateral such as ETH only to issue DAI with a lower value? You could have sold your assets directly to USD instead."

That is an interesting question John. Here is your answer :

1. Future Value: Maybe you have something valuable, like ETH, but you need money right now. You think it'll be worth even more in the future, so you use it as backup to get DAI and have cash on hand.
2. Avoiding Taxes: Sometimes, if you sell your valuable stuff, you have to pay taxes. But if you use it to get DAI, it's like getting a loan, and you might not trigger those taxes.
3. Investing More: You believe your valuable stuff will become even more valuable. So, you use it as backup to get DAI and invest in more stuff, hoping to make more money. It's like a financial strategy.

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"How do I get my hands on some Dai (DAI)?" Wow John, slow down a second.

There are two main ways to get some Dai (DAI):

1. Minting DAI: Imagine you have some valuable stuff, like gold bars, worth $15,000. You need $10,000 in cash but don't want to sell your gold because you think its price will go up. So, you go to a pawnshop and use your gold bars as collateral to borrow $10,000 with an 8% interest rate. You both sign an agreement.
   Now, let's switch to DAI lingo: Instead of gold, you use your Ether (ETH) as collateral on the Maker platform to mint or 'borrow' DAI. You'll need to repay your 'loan' along with the 'loan interest,' which is called the stability fee when you want to get your ETH back at the end of your loan.
   Here's an overview of how you can mint DAI: On the Maker platform, you can borrow DAI by locking up your ETH in a vault. If 1 ETH is worth $150, you can lock in 1 ETH and get a maximum of 100 DAI ($100) with a 150% collateral ratio. There are different types of ETH vaults, but we'll keep it simple. Just remember not to borrow the maximum allowed (100 DAI) to have a safety buffer in case the price of ETH drops. You want to ensure your collateral ratio stays above 150% to avoid penalties.
2. Trading DAI: The methods above explain how DAI is created. Once DAI is created, you can send it anywhere you want. Some people send their DAI to cryptocurrency exchanges, while others buy DAI from these exchanges without needing to mint it. Buying DAI this way is easier because you don't have to lock up collateral or worry about collateral ratios and stability fees.

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"Hey, a black swan event? Is this thing real?" Yes John, in the crypto space everything is possible. But it is not what you may think. Here is what a black swan event really is:

A black swan event is like a super unexpected and crazy thing that can cause really bad stuff to happen. If the stuff that's used as collateral for Maker drops a lot in value, they have a backup plan called Emergency Shutdown. It's like a last resort button they can push to stop everything and settle everything down.

This emergency thing is used to make sure people who own DAI and use Vaults get the right amount of money they're supposed to. For example, in March 2020 (which was like a super crazy day called Black Thursday), the price of ETH dropped by 50% in just one day. That almost triggered an Emergency Shutdown for Maker. But they managed to handle it by doing something called an automated debt auction (even though they were a bit slow because of the sudden drop) and also by adding USDC as new collateral to support the system.

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"So why should I use Maker?" If it is not clear enough already John, here is a very simple explanation:

Well, there are lots of stablecoins out there, but Maker is different. It's fully on the blockchain, which means it's super secure, can't be changed, and everyone can see what's happening.

Maker also has really strong security measures and systems to keep things safe. They're always checking for risks and have real-time info to make sure everything's okay.

And that's it for Maker's stablecoin, DAI.

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Next, we will teach John how to use Maker:

Minting Your Own DAI:

Step 1:

• Go to https://oasis.app/
• Click on "Borrow."
• You'll be asked to connect your wallet. It's free, and all you need to do is sign a transaction.

Step 2:

• Click "Start Borrow" on the borrow page https://oasis.app/borrow/
• Choose the cryptocurrency you want to use as collateral (lock-in).

Step 3:

• Let's say you picked ETH as collateral.
• Enter the amount of ETH you want to lock in (collateralize). Note that the minimum borrowing amount is 20 DAI.
• Click "Continue" and follow the instructions.

Step 4:

• Congrats! Your ETH vault is now created.

Saving Your DAI:

Step 1:

• Go to the Save page on the left sidebar https://oasis.app/save

Step 2:

• Click "Deposit."
• Enter the amount of DAI you want to save.
• Click "Proceed."
• Confirm in your wallet.

Step 3:

• And you're done!
• Please note that you only have one DSR account. If you deposit more DAI after your first deposit, it will be added to it.
• As of April 2021, the DSR has a 0% APY (Annual Percentage Yield).

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Congrats John, now you know what Maker is and how it operates. Slowly but surely, John is becoming more educated day by day.

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TL;DR :

• Tether (USDT) aims to be worth $1 but is centralized, so trust is needed.
• DAI (DAI) stays at $1 with decentralized collateral, making it trustworthy.
• Maker has DAI and MKR tokens on Ethereum.
• DAI is backed by various assets, and MKR allows voting for improvements.
• SAI used only ETH as backup, DAI added more assets.
• Governance and key parameters are decided by MKR token holders.
• Use Maker for security, transparency, and risk management.
• Get DAI by minting with collateral or trading on exchanges.
• Emergency shutdown protects DAI holders from extreme events.
• Choose Maker for its blockchain-based security.
• To use Maker, follow steps for minting or saving DAI. Minting involves collateral, saving doesn't.

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All of the info above was written by me with the help of the How to Defi book from Coingecko(that is why the ETH price is so low). Hope it helped others like it did for our boy John here!