Make Money Selling Dai – USEFUL COIN
The cryptocurrency world loves decentralization. Even organizations aspire to be decentralized. One type of cryptocurrency-inspired organization is called a decentralized autonomous organization (or DAO). Some of these organizations encourage arbitrage.
Maker is one such DAO. Thanks to Maker, you can take out a collateralized debt position (or CDP). A CDP is a fancy word for a loan. The loan is not free. It must be repaid with interest.
There is another catch to this loan. The CDP that Maker allows us to take out must be collateralized. Presently, the collateral required for a Maker loan is Ether (or ETH).
Not only do you have to use ETH as a guarantee, but the amount of ETH that you need to supply as collateral is also more than the value of the loan itself. Presently, the minimum collateral you need to put up for 100 ETH worth of Dai (or DAI) is 150 ETH.
What sense does this make? The loan Maker offers us doesn’t make much sense to a consumer. It is actually irrational. It makes little sense to use 150 ETH to take out a loan to buy 100 ETH worth of chocolate.
Not only am I paying more for 100 ETH worth of chocolate, but also am I paying interest. An overcollateralized loan is totally nonsensical in this regard. It is especially irrational if I expect the value of ETH to increase. Clearly, Maker isn’t trying to make it easier to acquire real goods like chocolate.
Why, then, does Maker exist? Why have people committed half a billion dollars to Maker’s financial contraption?
The reason is simple. The assets locked into Maker CDPs were not committed out of a desire to consume real goods and services. The assets were committed because of a desire to make more on an existing financial investment.
In some ways, the total value locked (TVL) in CDPs an indication of a bullish sentiment around Ether. CDP holders are most likely bullish on ETH in the long term. If they weren’t bullish, they’d invest their idle capital directly into some other enterprise with a cost of capital under 14% (i.e. the interest rate of a Maker CDP).
However, they’d never do that because they expect the value of ETH to appreciate more than 14% over the year and they don’t want to miss out on that increase in the value of their investment in Ether.
Given Ether’s history of appreciation, it is not unreasonable to expect ETH to appreciate more than 14% over the year. Therefore, as long as I can repay that 100 ETH loan (plus interest) in a profitable scheme, a CDP is totally rational.
For example, if my buddy says to me that he can guarantee me a 15% return in some endeavor, I’d be a fool to not hang on to my ETH if I expect ETH to appreciate 17% or more within a year. Simultaneously, I’d be a fool not to take out a Maker CDP and invest that additional capital into my friend’s venture.
Maker gives us financial leverage. The acquisition of leverage is the only valid reason to take out a CDP. The awesome thing about the leverage Maker affords us is that it is totally decentralized and impossible to censor.
There is an issue with the CDP. It is collateralized with a volatile asset (i.e. ETH). Volatile assets have prices that are constantly and frequently changing. It would not be wise to finance your chocolate consumption with volatile collateral.
That is because Maker gives us leverage in the form of Dai. Dai does not fluctuate as much as ETH. In fact, Dai is redeemable for one dollar and Maker will do just about anything to make it stay that way.
Mild price fluctuations are not bad for CDP holders when the price of Ether generally appreciates with respect to US dollars. However, volatility is not good when Ether declines in value with respect to the dollar. Declines in the value of ETH can offset the gains from selling DAI (or make you regret consuming that chocolate even more).
Major fluctuations in price, however, are truly worrisome. If the price of Ether declines past a certain threshold, Maker forces us to pay our debt. This scary phenomenon is known as liquidating a CDP. The liquidation fee is presently 13%. It’ll cost you, but use DeFi Saver if you are concerned about liquidations.
To make money risk free trading DAI, we need to limit our exposure to a decline in the price of Ether with respect to the dollar. Hedging allows us to make DAI to sell profitably at 1% while the value of Ether fluctuates.
One way of hedging against the fluctuation is to take the 150 ETH that you want to commit to a CDP and divide it in half. Put only one half in the CDP. Then short the remainder.
Shorting the remainder means selling (the 75) ETH so that you can later purchase it at a lower price. This provides insurance for the other 75 ETH that must serve as collateral for the Maker CDP. Any profit from the short offsets any loss in value in ETH locked in the CDP.
The simplest way to short ETH is to use Opyn. The Opyn short can be offset at any time. Unfortunately, it will cost you about 0.8% in fees and other transaction costs to do so.
To avoid excessive transaction fees, use DDEX. The DDEX user interface (UI) is a little harder to navigate than Opyn’s if you are not familiar with margin trading. That said, the absence of transaction fees makes it worth your while to learn the UI.
DDEX does charge a rental fee of 2.02% presently. However, this 2% annual rate is immaterial if you try this money making scheme over short periods (under 24 hours).
The DDEX UI encourages you to short with leverage starting at 2X. To keep things balanced, we need to redo our math. Instead of doing a 1:1 split, we need to do a 2:1 split. That means putting 100 ETH into the CDP and only 50 ETH into the hedge.
Dai is made through the Maker CDP Portal. The process of making Dai is called minting Dai. When Dai is made, its value is exactly one dollar.
Consequently, the final part of this profitable enterprise is the arbitrage operation. In our case, arbitrage means minting Dai (using the Maker CDP Portal and the Coinbase Wallet) and selling the 1% return for USDC on Coinbase.
Convert the USDC premium to USD. This conversion costs nothing on Coinbase. The converted amount is your revenue. You just made money out of thin air.
You aren’t done yet though. The final steps are to close the Maker CDP and offset the DDEX hedge. Both operations require gas. Which is a nagging fee we all have to pay to engage smart contracts on the Ethereum Network. Closing the CDP also requires that you hold a dollar’s worth of Maker tokens (or MKR).
Due to gas, Coinbase/DDEX/Maker network fees, and other transaction costs, the minimum amount of Dai that you need to mint and sell to safely make a profit is presently around 500 Dai.
This means that exploiting arbitrage opportunities is still primarily an activity for those wealthy enough to have about 10 ETH sitting idly in a hardware wallet. This will all change when Silvio Micali finishes implementing gasless smart contracts on the Algorand Network in 2020.
Please repeat the arbitrage as often as you can until the opportunity disappears. It is your duty as a capitalist. If capitalist seems a vulgar word, replace the word with: rational human being. Efficient markets depend on people doing their best to exploit arbitrage opportunities.