How to participate in Ethereum DeFi overcollateralization?

After experiencing the ICO frenzy in 2017, Ethereum once fell into a trough, but then slowly developed another ecology - decentralized finance, Ethereum once again showed great vitality.

Decentralized finance is Decentralized Finance (DeFi for short). The so-called decentralized finance refers to all activities related to financial transactions that anyone can participate in without supervision or threshold. Because it has no regulation and no threshold, it has attracted a large number of enthusiasts to develop various Dapps related to financial services.

According to the latest data, the total value locked (TVL) of the Ethereum decentralized finance ecosystem has once again surpassed the $1 billion mark in recent days, which is the highest since the coronavirus panic caused DeFi investors to flee to safer assets on March 7. level. TVL is up nearly 89% in less than three months from a low of $531 million hit on March 16.

And this momentum of rapid development continues. Among the many decentralized financial applications, one of the most basic and bottom-level applications is to generate the stable currency DAI in Ethereum.

DAI is a stable currency issued by the MakerDAO team. It is anchored 1:1 to the US dollar and issued by a smart contract developed by MakerDAO. The issuance of DAI requires collateral. In the early days, the only collateral that could be used to issue DAI was ETH, but now there are a variety of ERC-20 tokens in Ethereum that can be used as collateral, such as USDC, wBTC, etc. However, the most commonly used collateral is still ETH.

To generate DAI with collateral in MakerDAO, an over-collateralization is required. What does it mean? That is to say, the value of the mortgaged items exceeds the value of the generated DAI.

We use ETH as collateral to introduce the following DAI generation process.

For example, the price of ETH today is $240. We assume that the user uses one ETH as collateral to generate DAI, how much DAI can he get? In MakerDAO, the mortgage ratio is 1.5 times. That is to say, if an ETH is worth $240 when it is mortgaged, then the DAI it can generate can only be worth $240/1.5 = $160, that is, 160 DAI. This is how overcollateralization works.

After the user uses this ETH as collateral to generate 160 DAI, MakerDAO's contract will monitor the price of ETH at regular intervals. Once the price of ETH drops to close to $160, which is the total value of DAI generated, it is possible that the price of ETH held by MakerDAO will be lower than the total value of DAI it generates at any time.

This loss-making business cannot be done, so if the mortgaged user does not continue to replenish the collateral at this time, then MakerDAO can only auction the ETH it holds to exchange for the principal as soon as possible to ensure that it does not lose money.

When the user wants to redeem the ETH he mortgaged, he only needs to enter the 160 DAI we lent out to the MakerDAO contract and then add a certain loan interest to redeem the ETH.

This is the process of borrowing and lending to generate USD stable currency DAI in Ethereum decentralized finance.

After the user pledges ETH to borrow the USD stablecoin DAI, he can use DAI to trade ----- For example, if he is optimistic that ETH will continue to rise in the future, he can use DAI to continue to buy ETH, and then continue to mortgage the purchased ETH... Going on like this is equivalent to trading with leverage to buy more ETH.

This way of borrowing is very similar to the mortgage loan we use in our daily life to a large extent. In daily life, if we take our real estate to the bank for mortgage, if our real estate has a market value of 1 million, usually the bank will only lend us cash at a price of about 600,000 or even lower.

But by performing this operation on Ethereum, we save the bank as an intermediary agency, and also save the entire process of the bank's assessment and review of our collateral; in addition, there is no threshold and no time limit for this mortgage process. It can be done anywhere, so it saves a lot of intermediate costs and greatly improves efficiency.

This is a subversive application of Ethereum decentralized finance to the segmented field of bank lending.

So how can ordinary investors participate in this game? Below I will take you through a step-by-step test. Note that before testing, we need to make sure that the Ethereum wallet MetaMask is installed on our browser.

Let's first enter the relevant website of MakerDAO to generate DAI:https://oasis.app/, you will see the following interface

We choose to click "Borrow Dai", and we will see the following interface:

In the above interface, we select and click "MetaMask", and we will see the following interface:

We enter the password of MetaMask, and then click "log in" to log in, and we will see the following interface:

We click "Enter" in the center of the screen, and we will see the following interface:

We select "ETH-A", then click "Continue", and you will see the following interface:

We click "Initialize" and "Continue", which will trigger the operation of the smart contract, so we have to pay the fee in ETH for this. At this time, MetaMask will pop up, and we click "Confirm" on MetaMask to pay the handling fee.

At the time of writing, because Ethereum is very congested, the transaction takes a long time and the cost is high, and the remaining interface cannot be displayed in a short period of time, so we cannot show the interface of the remaining steps.

According to the normal process, when this operation is completed, the next step is to use the ETH stored in our wallet to generate the stable currency DAI. This operation also needs to pay a handling fee and wait for a long time.

Users can follow the prompts on each step page step by step. After the operation is completed, they will get the stable currency DAI generated by mortgaging ETH in our wallet.