Introduction to generating DAI and operating on Aave
As my final project in course Bitcoin and Blockchain taught at Prague University of Economics and Business, I have decided to dive into two main topics, DAI and Aave. I have recorded a short tutorial on YouTube on these two subjects and I will be further describing them in this following article.
Link to my video on YouTube: https://youtu.be/hbn42q_oiEo
What is DAI?
Before we dive into the matter of generating DAI, it is necessary to introduce to you what DAI is. DAI is the first decentralized, collateral-backed cryptocurrency, founded in 2014 by a Danish entrepeneur Rune Christensen. DAI is an ERC-20 token, which was designed to maintain a peg to the US dollar, also known as a stablecoin generated and maintained by the Maker Protocol, a decentralized application running on top of the Ethereum blockchain.
It is up to you how you decide to operate with DAI, you can spend, lend, save and do tons more with it. In order to obtain this stablecoin, you can easily obtain it buy directly buying it or through exchanges. However, in this article we will talk about a different way of earning it and that is the generating of DAI.
DAI and MakerDAO
DAI is maintained and regulated by MakerDAO, a decentralized autonomous organisation. When you go to MakerDAO’s main website it will lead you to this so called Oasis.app, where you will find out that it is a digital platform, which enables you to either multiply your exposure or borrow against your crypto such as ETH, BTC, MATIC and generate DAI. DAI is created whenever someone takes out a loan on MakerDAO and burned when loans are paid back.
How to use Oasis Borrow to open a Vault
Oasis Borrow allows you to borrow DAI against any collateral cryptocurrency supported by the Maker protocol like ETH, WBTC and so on. To get started, you’ll need a compatible wallet, a supported collateral type and enough asset for gas fees.
Oasis Borrow offers many benefits such as extra liquidity, the ability to use multiple collaterals, colletaral ratios, which are suitable for multiple risk profiles and flexible repayment schedules. However, it also comes with risks, since users need to be properly collateralized to avoid liquidations. In my research I have found out that you as a borrower have to maintain the collateralization ration above the minimum required at all times otherwise the Vault you opened will be liquidated. When the price fluctuation of assets drives down the ratio to the minimum, you have two options: repay DAI, which will reduce your outstanding debt, or lock up even more collateral, which will increase the collateralization ratio.
A simple example would be, 1 ETH, valued $ 1957 is deposited as collateral to an outstanding debt of 500 DAI, meaning the collateralization ratio is equal to $1957/$500.100 = 394,14%. The minimum collateralization ratio is for instance set at 170%, so when the price of ETH drops and the ratio is getting close to the minimum, you as an user will have to either repay DAI to reduce the amount of debt or increase the amount of ETH locked as collateral in order to prevent Vault liquidation.
In my project I used MetaMask and connected it to Oasis as you can see below.
However, are also a poor student like me, who works a poorly hourlypaid part-time job, you will soon be hit with the sad news as you proceed. That is the minimum of DAI that needs to be generated in order to open a Vault.
My main purpose in this project was to generate DAI and eventually operate with it on Aave, about which I will talk later in this article. However, this didn’t stop me from obtaining DAI. Instead, I decided to use my amount of ETH, which I purchased for educational purposes of this course and tried to swap it on Unicornswap as you can see in my video.
However, if you want to see further steps into opening a Vault you can check out this tutorial.
Now, moving onto Aave
After obtaining some DAI I looked into Aave. What is Aave, you may ask. It is a decentralized lending system that allows users to supply, borrow and earn interest on crypto assets without going to a centralized intermediary. As an user you can deposit digital assets into liquidity pools, which become funds that the decentralized finance protocol can eventually lend out.
Like in other decentralized systems in this DeFi system, you also have to post collaterals in order to operate such as supplying or borrowing assets. You may post DAI as collateral and borrow in ETH for instance. This means, that an user of Aave can ultimately gain exposure to a wide range of different cryptocurrencies without owning them outright.
On Aave there are multiple markets on which you can borrow or supply your assets. There’s Ethereum Market, Polygon Market, Avalanche Market and so on.
In my video, you can see my attempts to supply all kinds of assets, from ETH, DAI to also MATIC on Polygon Market.
But for instance when it comes to borrowing on Aave, I recommend reading up further on health factors, which are the numeric representation of the safety of deposited assets against borrowed one and its underlying value. The higher the value, the safer is the state of your funds against a liquidation scenario.
When you click onto the FAQ section on the website of Aave, you will find further information on a whole range of topics related to Aave, such as Depositing & Earning, Borrowing, Liquidations, Flash Loans etc.
Having read my article and seen my video on youtube, I hope you now have a better understanding of DAI and the Aave decentralized finance platform. Through this project I had the chance to freely explore further into topics that interest me, therefore I hope that it is as much helpful and educational for you as it was for me, even though it was quite costly due to high fees. If you would like to further engage into this topic, do check out the websites, which I have linked in this article. :)