Anyone Can Now Get 6% on a Dollar-Pegged Asset
Also, Aave launched on mainnet, making unsecured, on-chain loans a reality.
|Camila Russo||Jan 9|| 2|
Hello defiers! Here’s what’s going on in decentralized finance,
MakerDAO raises Dai Savings Rate to 6 percent
Aave launches on mainnet enabling first fully on-chain unsecured loans
Earn 3x the Interest on a Dollar-Pegged Asset With DeFi
With DeFi, you can now earn 3 times the interest on Dai, a dollar-pegged stablecoin, than what traditional banking apps offer for USD deposits.
MakerDAO’s MKR holders voted to raise the Dai Savings Rate by two percentage points to 6 percent yesterday, the highest it’s ever been since the platform’s November upgrade, which introduced DSR and allowed for many types of collateral to back its Dai stablecoin.
💡DSR is the interest MakerDAO pays users for locking up their Dai in a smart via Maker’s Oasis platform. DSR is paid with the system’s stability fee Maker users pay for borrowing Dai. Both DSR and the stability fee are mechanisms MakerDAO uses to control the supply of Dai, so that it retains the one-to-one peg to the dollar.💡
MKR holders also voted for a stability fee increase to 5 percent from 3 percent. The reason for the rate hikes was that increased Dai supply was making the stablecoin drop below the $1 peg. Higher rates should make more users lock up their Dai to gain DSR, and fewer users take out Dai loans, restricting supply and pushing the price up closer to $1.
Three Times Higher
The current 6 percent rate is more than three times the ~1.8 percent offered by fintechs such as Robbinhood and Betterment, according to data compiled by LoanScan. And you don’t have to have a U.S. bank account to earn it. This is important: Anyone with an Ethereum wallet, located anywhere in the world, can turn some of their savings into a dollar-based asset (Dai), and start earning 6 percent interest on it (DSR) right now.
It’s been a quick climb from the 2 percent rate offered when DSR was first launched about three months ago. Interest on Dai in its previous, single-collateral version (now called Sai), got to be much higher, crossing over 15 percent mid last year. Keep in mind though, this rate was offered by other lending platforms, such as Compound Finance and dYdX, while DSR is offered directly by MakerDAO, the issuer of Dai itself.
Image source: DeFiPulse
No Extra Risk
This means that users earning interest from DSR aren’t taking any additional risk other than MakerDAO risk, which should be the same as buying Dai.
While it’s safer to earn interest on Dai directly from Maker, other platforms have devised tokenized versions of DSR, which some users may consider more convenient than having to lock up their Dai in a smart contract. Some of these tokens are Chai, Compound’s cDai, and Fulcrum’s iDai. They can be held directly in users’ decentralized wallet, while continuing to earn interest, like a portable savings account, and used for other financial transactions.
In the hours after MakerDAO raised its DSR, DDEX was momentarily offering a staggering 10 percent for Dai lending, but that spread has now closed to a little over 6 percent. Of the other major DeFi players, Compound, Torque and Fulcrum were offering almost 6 percent, while dYdX lagged at around 4.8 percent.
Image source: LoanScan
Aave Launch Raises the DeFi Bar in a Flash
Aave is an open source, non-custodial lending platform that launched yesterday on mainnet with a series of groundbreaking innovations for decentralized finance, including uncollateralized flash loans and fixed-rate, short-term loans.
Here are the platform’s main features:
Users are able to borrow from Aave’s reserve pool within one transaction, without putting up any collateral. Aave can get away with not guaranteeing the borrowed amount from pseudonymous users (read: No KYC needed) by demanding that the loan is returned to the pool before the transaction ends. If it’s not, then the the transaction is reversed, protecting funds in the reserve pool.
While this tool is designed for technical users, who can potentially use these flash loans for high-speed trading, Aave’s flash loans are effectively the first fully on-chain, unsecured loans. Hopefully this first version, will keep evolving to allow for less speculative use-cases and non-technical users.
Stable Rate Loans
Most loans in DeFi have variable rates, meaning borrowers will be subject to the cryptocurrency market’s wild ups and downs. Aave reduces this risk by offering a stable rate model model for short-term loans. As of today, stable-rate loans are offered on Aave for stablecoins like Dai and USDC. Maybe because of the lack of liquidity in the very early days of the platform, rates aren’t competitive compared with other lending protocols. For more long-term loans, users can switch between stable and variable rates, to protect against changes in market conditions.
Aave is also offering perpetual loans, which allow users to get liquidity from their deposits indefinitely. All fo Aaave’s loans, except flash loans, are overcollateralized.
🛠I tested it out, and found it was simple, fast, and cheap, with gas for the whole process at only a couple of cents. I put up 6.4 Dai as collateral, and got the maximum I could get for that collateral, which was around $4 in ETH, at a 3 percent fixed-rate. To note, I didn’t see the option of doing a flash loan. This is what it looks like:
Aave’s aTokens are interest bearing tokens like Compound’s cTokens. The difference is they aims to offer users a simpler way to track interest accrued by pegging them one-to-one to the underlying asset that’s gaining interest. For example, for cDai (a Compound token which earns interest in Dai), the value that shows up in users’ wallets depends on the cDai exchange rate, which is now 0.02 Dai, meaning 1 Dai will get you 50 cDai. aTokens want 1 Dai to get you 1 aToken, and interest will be added to that amount.
Chainlink oracles are securing Aave’s 16 cryptocurrency price feeds, and it says it’s “the first lending protocol to leverage off-chain data for calculating lending rates” using Chainlink’s decentralized network of price oracles.
Alex Pack, founding partner of Dragonfly Capital, and Haseeb Qureshi, Dragonfly managing partner, explain on Laura Shin’s Unchained podcast what they think will happen in the smart contract platform race, why Ethereum is so far in the lead and whether anything will become an Ethereum killer.
StarkWare told The Block Ethereum can handle 9,000 trades at 75 gas/trade, compared with 2,000 trades at 300 gas/trade, on Layer 1, or a 2,000 times improvement, after the Istanbul upgrade.
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About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.