I’ve made a few videos in the past talking about MakerDAO CDP vaults and how I use them to collateralize a portion of my crypto in order to gain liquidity to invest in other things. Sometimes I use this liquidity to reinvest in the same collateralized crypto (i.e. using the vault to collateralize BAT and generate DAI debt in order to buy more BAT), effectively making it a margin trade.
There are plenty of other use cases out there as well. Even using the vaults to generate liquidity for fiat-based investments.
A few people have asked if I could cover more aspects of these CDP vaults since there can be a lot of uncertainty involved when it comes to setting up your first vault and taking out a loan. One of the top questions is related to the process of paying back DAI debt after you’re done with the loan.
In this video, I cover the quick process of paying back DAI debt and even show how I use Uniswap to convert crypto out of collateralized vault into DAI to pay itself back. It’s an interesting concept because you can wait for the price of the underlying (in this case, BAT) to go up and then use the profits from the increase in price to pay back the loan itself.
In This Episode:
- Withdraw BAT From MakerDAO CDP
- Convert BAT into DAI
- Pay Back DAI on MakerDAO
- Increase the Collateralization Ratio and Lower the Liquidation Price
Listen & Subscribe to the LeoFinance Podcast!
Join Our Hive Community & Earn LEO Rewards!
Earn LEO + HIVE rewards by creating crypto/finance-related content in our PeakD community or directly from our hive-based interface at https://leofinance.io.
| Track Hive Data | Blog & Earn LEO | LEO FAQ |
|---|---|---|
| Hivestats | LeoFinance | Learn More |
 |  |  |
▶️ 3Speak
Posted Using LeoFinance
How does the interest work for CDP loans? How do you know how much interest you're paying and how/when do you pay the interest? Does the amount of DAI that you need to pay back slowly increase over time or is it something else?
You can see the current rates here:
https://defirate.com/dai/?amount=100&term=180&rate_type=borrow
They do change the rates sometimes. For the type of collateral loan I have (DAI loan through MakerDAO), the interest rate is 0.5% right now.
The interest accrues as extra DAI that needs to be paid back on my CDP, but the rate is so low that I barely give any attention to it. In this vault, for example, I had a $3000 DAI loan out for a few months and it accrued less than $3 in interest.
Posted Using LeoFinance
Wow, ok that's super low. At one point (like a year ago) I heard that the interest rates were really high and can change a lot without you knowing so I sort of stayed away from the whole thing.
On the last roundtable you guys talked about getting some yield on crypto investments via these types of loans. I have a decent amount (for me) of BTC and ETH just sitting there, do you have any recommendations for a safe way to put at least some of that to use? For example, if I set up a CDP with some ETH, what should I then do with the DAI to earn the yield?
Yeah at one point I think the rates got up to something like 30% and they can change on a whim. They've become a lot more stable now as DeFi has matured and MKR governance has gotten better (a year in crypto is like 10 years irl).
Personally, I would (and currently do) use the ETH to take out a collateralized DAI loan and then stick the DAI into something that I believe has a good value prop. long-term.
There are really a million things you could do with the liquidity. We've even mentioned buying Splinterlands Cards and renting them out with the DAI on the roundtable. This is what I've done in the past:
I also used a service called BlockFi to take out a collateralized loan on my Bitcoin. They wired it to my brokerage account and I bought stocks with it.
Sorry for the long answer. Put short(er) - there are a lot of different things you can do with the liquidity once you get it. It just depends on your desired risk/reward. For me, taking out a DAI loan to buy something like BTC makes a lot of sense, but I do have a higher than normal tolerance for risk. Some people like to take out loans and do "DeFi Yield Farming" - I've never done yield farming personally and feel like it's just too time consuming.
Posted Using LeoFinance
Well if I use the DAI to invest in crypto then that's basically just using leverage/margin. I'm already pretty heavily into crypto and I don't want to add more risk than there already is there.
I was thinking of keeping it in a stable coin and lending it out to earn some interest, as I've heard there are some good options to do that, but I'm not clear on what the risks are of loss of principle there.
I've been looking at lending on the crypto.com earn system since I have a crypto.com debit card which I freakin' love, but like I said I don't really know what the risks are. They offer like 12% returns on stablecoins which is fantastic.
Exactly - it's a margin trade to buy more crypto with the DAI loan. I do that to some extent with an amount that I'm willing to lose.
Taking out a loan then lending out that loaned amount as a stable coin is a common practice. You can definitely get about 8-12% from doing that in various places.
I've never used crypto.com for that, but the risks are generally protocol or centralization. When you lend out your crypto (or even use it in a collateralized vault), you're essentially giving up the keys to that crypto.
When you give up the keys, you're open to the third-party risk of protocol failure, hacks, a centralized entity breaking down, etc.
I think the risk level is generally pretty low (depending on where you choose to lend out from), but there's still a risk of a system-wide failure - things like the DAO event on ETH a few years back, Bitconnect, Mt gox, etc. come to mind.
Posted Using LeoFinance
Yea, that's what I thought, thanks. I don't think I'm comfortable locking up a significant amount of crypto into one of these protocols due to the risks of some type of system failure. That being said, I do have is a pretty decent sized stake in CRO in order to get higher reward tiers on their debit card, and on top of that it pays 18% APR on the CRO tokens which is insane. I recognize it's probably risky but it's not my core crypto holdings and I'm mostly doing it for the card and not the returns.
Crypto Educational contents are valuable.
Keep them coming
Posted Using LeoFinance
I agree! We're bringing a lot of new faces to Hive. We'll keep them coming
Posted Using LeoFinance