Is MakerDAO the Solution To The Instability In The Cryptocurrency Market?

Repositories

• https://github.com/makerdao
• https://github.com/makerdao/community

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Undoubtedly, there are numerous advantages to instability when it comes to trading. Is there any business enterprise that does not directly or indirectly depend on instability anyway? Trading itself is built around volatility which results in an entity value rising and dropping with respect to the influence of demand and supply. So, it just depends on how we want to look at it. However, I do wonder why this volatility has such an impact on cryptocurrency.

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Pixabay image - CCO licensed

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The challenges

We all love it when cryptocurrency is in the uptrend. We check our digital assets portfolio, see the figure doubling in time, smile and still wish we had invested more than what we did when the prices were at the bottom. I remember the atmosphere in the cryptocurrency space in the last quartile of the year 2017. Both the major and minor coins were surging in values at a lightning speed. I only had around 0.5 Bitcoin at the time but it felt like having a million USD in my bank account. Then 2018 came in with its crisis; one that digital assets have been battling to get out of ever since then.

Volatility has done as much damage as good when cryptocurrency trading is concerned. Sometimes I feel like crypto trading is more or less gambling. Then I realize that all business enterprises are like that. As far as I can tell, we can never get pleasure from this highly-lucrative industry until we accept the fact that the best way to make headways in life is to devote much resources on one’s investments. Sometimes you just need to take the risk even when all odds point to destruction.

The best way to enjoy the benefits of crypto trading is to not depend on the invested money. Invest the money, HODL your assets and do not even think of coming to the money when you are broke. Else you end up losing some fortunes. I have emptied my wallets on several occasions due to life challenges. Whenever I sell my assets at a loss, I feel bad. Who doesn’t! Now I have a way out with MakerDAO as I do not need to sell those coins at a loss anymore. I get to spend some tokens without losing possession of my assets.

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Understanding MakerDAO and how it works

MakerDAO is a blockchain enterprise that brought a new initiative which touched the untouched places in the cryptocurrency space. This token brings stability to the cryptocurrency market by giving us; the fanatic traders and investors of these next-generation currencies the ability to retain the value of our assets, HODL them and sell them only when their prices bring in maximum profits. Isn’t trading all about making profits anyway!

Source

Countless traders have lost some fortunes to the continued drop in the value of cryptocurrency for months. However, we are only still losing our money because not so many of us know of the solutions on the ground. You do not need to preach the evangelism of HODLing to crypto enthusiast anymore. An average trader knows the benefits of doing this. Nevertheless, life has a way to get us frustrated and sometimes we just cannot but sell these assets even when the prices are at the bottom. With Maker Dao, things do not need to be like that anymore.

MakerDAO uses a stabilization algorithm to peg its protocol token, DAI around which a new economy is built in the cryptocurrency industry. On this network, we can print the protocol token called DAI, spend it instead of the digital assets in our portfolios and stake some ETH to act as collateral. The DAI token is pegged at 1:1 with USD. This helps us in retaining the value of the staked assets which can be withdrawn when we return the borrowed DAI tokens.

I know this is kind of hard to comprehend. It took me some time to understand as well and that was why I had to part way with some of my digital assets even when their prices bottom-rocketed. That stopped ever since I got to comprehend how MakerDAO works. Whenever we print DAI tokens, we open something called Collateralized Debt Position, CDP, thereby depositing some ETH equivalent to 150% of the printed DAI token.

As far as I can tell, MakerDAO brings a balance in the cryptocurrency market. This is due to the ability of users to get liquidity by generating the DAI stablecoins without the need of giving up the ownership of our assets that serve as collateral in the system. The users part their ways with 20.5% of the generated Dai stablecoins throughout the year for enjoying the functionalities of this system. This provides a means of maintaining the ecosystem and ensuring that the stablecoin remains pegged to $1 despite the volatility in the market.

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Various components of the MakerDAO ecosystem and how they solve the problems in the cryptocurrency sector

• Collateralized Debt Position (CPD)

MakerDAO’s CDP is the core entity around which the whole network is built around. It is an Ethereum network-based smart contract that facilitates an indenture agreement that takes place between the generated stablecoins through MakerDAO’s protocol and he staked ETH coins by the users. The CPD creates an economy through which we liquidate our digital assets without losing their possession. I found this to be a next-generation initiative that is creating a balance in the cryptocurrency sector.

• Stability fee

I will define this as a difference between the annual and continuous compounding fees as regards generating DAI stablecoins. Now let me break this down to as much as I can. The stability fee is another important part of MakerDAO ecosystem. Let us face it; despite the resources around it, the stablecoin fights with all its strengths to stay around its pegged value which is $1 USD.

From what I have learned in my little time of trading cryptocurrency, there are always some entities trying to enforce imbalance around every cryptocurrency coin. To make things more complicated, by using another coin, ETH as collateral in this coin loaning, we are literally going long on it (ETH). Think about what I am trying to point out here: We can literally generate as much DAI stablecoin as we want, use it to purchase as much ETH coins when ETH price is down and then sell the ETH when the price rises by returning our generated stablecoins.

This is pretty easy and we get to make a lot of profits since regardless of the forces working against its value, DAI is always around $1 USD. However, to ensure that the value of DAI is maintained, there is a need for the users to be paying some fees, reducing the profits and ensuring that the system is balanced. This fee is percentage-based and is calculated with respect to the continuity and annual transactions of the users.

• Wrapped ETH (WETH)

Here is another important component of the MakerDAO ecosystem. What we need to understand is that MakerDAO uses multiple ERC20 tokens for different purposes on the network. Now we should wonder why ETH is being used as collateral when it is not an ERC20 token in the first place. ETH is being used to generate DAI stablecoin but not directly. Firstly, it needs to be wrapped and transformed into WETH which is an ERC20 token.

By wrapping the ETH before being used, we are contributing to the survival of DAI stablecoin and ensure that its value remains as pegged. If we look at this very well, we will understand that this solves the problem of giving priority to ETH which could kill the MakerDAO system. We are all traders and investors and enthusiastic traders look for long-term benefits, not just making some quick profits.

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Features of MakerDAO

From my experience of using the functionalities of this exceptional network, I can draw some features which I see as advantages of the network to the whole industry. These features are discussed below.

Pixabay image - CCO licensed

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• Creating a balance in the cryptocurrency industry

There is nothing much to be said about this. As we could have learned from what we have discussed above, MakerDAO is focused on creating a balance in the cryptocurrency market. Of course, we love to see the values of our portfolio rising day by day due to volatility, no trader or investor wants to see his assets reduce in value. With MakerDAO, there is a balance between the rising and falling of digital assets value. This stability gives less room for volatility, thereby giving cryptocurrency one of its most-sought-after weapons to stand against fiat currencies.

• Providing liquidity

Now we have learned that we can actually spend some cryptocurrency tokens without losing possession of our assets. I believe I am not the only one seeing this as a great deal. I have already explained the importance of this and how it helps us from selling our tokens at a loss especially when life challenges request that we sell against our will.

• Aiding mass adoption of cryptocurrency

One of the drawbacks to mass adoption of cryptocurrency is the instability. Business-minded people find it difficult to venture on initiatives that its outcome cannot be easily predicted. MakerDAO’s functionality works on bringing balance to the industry by providing stability. This reduces the risk associated with trading and irrational sales of one’s assets. Value is added, the outcome is more predictable and more people have a reason to join this industry of the next generation.

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My final thoughts on this project

The world has seen the potentials of cryptocurrency and blockchain technology. Statements have been made and no one can doubt the establishments of this industry. However, its challenges include instability, inadequate knowledge of how it works and lack of authoritative backing. While the first and the last to be mentioned, more especially, have their way of being advantageous, their weakness cannot be ignored. However, MakerDAO is already an enviable initiative and is arguably the government that this industry needed but never had.

I am a fanatic user of this network and I know some stuff about it. From what I can tell, the DAI has been below its pegged value of $1 for the most part of 2019. Although, it is just a few cents less and most parts of the year haven't been one to wish for, for crypto traders. DAI stablecoin, however, needs to be able to stand the test of time in order to become crypto's default stablecoin and effectively bring the balance in the industry.

Obviously the team is putting in a great work. From my understanding, demand and supply battle has its influence on the reason why DAI has been struggling to hold its ground, especially with the users going long for ETH. I can tell with a significant certainty that this project is on the verge of shifting boundaries. MakerDAO is already the solution to many problems and it is just a matter of time before it successfully brings lasting stability in the crypto space.

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DISCLAIMER

This is not financial advice, nor a guarantee or promise in regards to any result that may be obtained from using the above content. The information provided here is for informational and entertainment purposes only. It should not be considered as financial and/or investment advice. No person should make any kind of financial decision without first consulting their own financial adviser and/or conducting their own research and due diligence.