DAI Explained: Is it safe to use?

Hey guys and welcome back to Box Money. Today we're going to take a look at one of the grandfather of all decentralized finance projects and one of the biggest decentralized stable coins out there, the DAI. So recently you've probably seen it. It's have over 300 million dollars of DAI in issuance and it was recently listed on Binance as well. So Binance listed both the MakerDAO, which is the project that creates a DAI and also the DAI coin itself. In this video, I'm going to focus more specifically on the DAI itself because it has immense trading implications and a lot of people are using this. It's becoming the darling of the DeFi space. In fact, more and more projects are preferring DAI over other different stable coins and it's to a point right now that DAI is so much demand that even though it's supposedly just worth one US dollar, that's the way it's designed, it's stable relative to the US dollar, that it's actually being sold at a 4% premium. So we'll tell you a little bit about why that's happening and also we're going to teach you go for the process of making this DAI as well. So if you're holding Ethereum and you know you want to generate some DAI to invest in other projects or go yield farming, then this is the tutorial you want to watch out for. So make sure you stay till the end for that. And finally speaking, we're covering a lot of decentralized finance projects recently. We have a whole list on decentralized finance right here. The playlist covers important exchanges like both Uniswap and Balancer. It also covers liquidity pools and yield farming. So make sure you can check that out. This episode is brought to you by Unstoppable Domains. With Unstoppable Domains, you can get your very own cryptocurrency.crypto domain. I have the domain boxmining.crypto. And what it does is that instead of people remembering your long cryptocurrency address, they can send cryptocurrency simply to boxmining.crypto. Now recently, Unstoppable Domains has been integrated into the Coinbase wallet. So Coinbase wallet being one of the top wallets on mobile phones. So now if you open the Coinbase wallet, and if someone wants to ever send me any cryptocurrencies, instead of typing that long address, they can immediately send it directly to boxmining.crypto. And it will just arrive directly into my account. Not only are they on Coinbase wallet, but they're on Huobi, Trust, my Ether wallet, all these wallets here. If you're interested in purchasing a .crypto domain, check out the link down below at unstoppabledomains.com. So let's start off with the idea of stable coins. This is extremely important in crypto, mostly for traders, because traders need to have the ability to enter or exit a position in Bitcoin, Ethereum, whatever coin they're holding, and they must have a way to, well, have access to something like the US dollar. Now, this space has mostly been dominated in the past by one of the biggest stable coins around. You guys definitely heard of it, and it is Tether. So Tether right now is sitting at a market cap of $10 billion. So there's 10 billion Tether in existence. And obviously, Tether is one US dollar. I mean, Tether is so popular that when people sell their Bitcoin, they always just say, oh, I tethered myself. And maybe with the die coming in, maybe in the future, will say, I died myself. That doesn't really make sense. But anyways, you get the picture. Now, with so much USDT in existence with $10 billion, you might think, oh, maybe USDT is enough. But actually, there's one fundamental flaw with USDT, which is that it's centralized. Now, why is that problem? It's because Tether Incorporated, the company that issues out Tether and creates it, they have the power to create as much Tether as they want. Now, they tell us they don't create infinite supply of Tether. They really create Tether when they have US dollar deposits. Now, the biggest issue right now is that do they really have these deposits? And where are these deposits? Now, how does DAI directly deal with that problem? Well, that's because DAI isn't backed by actual US dollars, but instead, it's backed by different cryptocurrencies. So as of right now, if you actually check out DAI, there's multiple options to generate it. For example, the most popular one being using Ethereum. But now very, very quickly, there's other options such as using BAT, KNC, ZRN, and MANA, and also other stablecoins too, along with wrapped Bitcoin. So now you're really generating a stablecoin backed by cryptocurrencies. And this has one huge advantage in the sense that you can always prove that these cryptocurrencies are there. In terms of transparency, this is a huge bonus. Because at any point of time, I can look at the contracts to check that yes, all that cryptocurrencies are there and it's held by that smart contract. So this is very powerful in terms of both transparency, but also in terms of decentralization as well. Because a person, a single entity doesn't control that collateral. So no one person can come in and steal all that Ethereum or just rob the entire bank off that BAT. Because it's been held by a smart contract, there are rules and regulations, there's mathematics in play governing that coin. But there is one fatal flaw as well though, is the fact that cryptocurrencies are highly volatile. They can change prices just like in a blink of an eye like that, we can see even sometimes Ethereum can go down 20% in value. So how is this all created? And what are the safe measures that are in place to make sure that DAI always holds one USD in terms of value? To explain this, let me work you through an example. So say, for example, I have Ethereum, and I want to generate some DAI. Now, what happens is that if you look at the current price of Ethereum, $317, it's worth this much. What MakerDAO wants me to make sure is that I have a over collateralization. So that means even though Ethereum is worth 317 right now, I can't generate $317 worth of DAI. That's just not enough collateral there. So instead, what happens is that I need to put up more collateral than I take out. So very much like the way a bank offers, I mean, at the end of the day, they don't want to take any risks. And they want to make sure that you have as much collateral as possible. So in the case of ETH, typically speaking, when I actually use the DAI, I draw around only one-third. That means the other two-thirds are used there for collateral. To explain this a little bit further, I really opted to show you a demonstration of this in progress and just highlight some key points along the way. So this way, if you ever want to collateralize your ETH and generate some DAI, you can follow this guide to do so. But it also gives you a very clear-ended idea of the strengths and weaknesses of what's going on. So let me just work you through the example. I'm on the OASIS app. So I'll put a link down below. This is what the app looks like. And I just click borrow here, and it leads me to the page where I can start to open my first vault to start generating DAI. In terms of what I'm using as well, I'm using this with MetaMask. So if you guys are familiar with it, MetaMask is one of the key ways to interact with Ethereum. It's not the easiest app to use. I have a guide up here for that. But yeah, we're going to use that for the series. Now, I have already 10 ETH inside. Let me click get started and start generating this. On the first page, you can choose the collateral type. In this case, I'm just going to go for the top one, which is ETH A. So I'm just generating DAI using Ethereum. And it also shows my balance here as well, because I've connected my wallet. You can now see that I have 10 ETH in the wallet. It also shows 10 ETH as a balance here. I'm going to click continue. Now, it's going to actually take me through the setup. So click set up vault and you have to sign a transaction on your MetaMask right now because gas fees are relatively expensive. So right now, if you look at it, we're almost at 70 Guay for a fast transaction. And since I'm making this video, I'm just going to, you know what, I'm just going to eat up the fees. I'm going to just type 72 up here to make a very fast transaction. It will cost me a little bit of money and it's going to cost me $21 max. I click confirm and we're ready to go. It always hurts when I spend $20 doing something like this. It's like, oh, this is just burnt. It hurts my heart. But anyways, let's see how it goes and progresses. All right, confirmed. Now that took almost two minutes. I think it's also important to note that the gas fee, the fee for this is actually less than the original quote, the maximum. So it ended up to be around $13.55 in terms of gas prices. So it's still expensive, but it's around roughly 60% of what the quote was. So 64%. So in terms of contracts, not too interesting, just like success. Now we're ready to go to the next step. So now we have this finished. I'm just going to click the refresh. Oh, it has to wait for 10 confirmations too. So we'll have to wait a little bit of time to wait here. So whilst we're waiting, let me tell you a little bit about my podcast. So it's called Bitcoin out of the box. It's really about bridging that gap between privileged institutional investors and the rest of us. We have these amazing insightful interviews and they are pretty much free for anyone. I can listen to it anywhere. So make sure you check it out. Perfect timing. We're done. We just configured the vault. We waited for the 10 confirmations for this to be possible and we can click continue and go. Now this is the main interface to generate the DAI. So we know that now we have roughly 9.95 ETH. So we have 9.95 ETH because we just used a little bit for the gas right now. So roughly that's worth $3,000. We're going to just deposit. Let me see. Let me just deposit 9 so I have enough Ethereum around. So I deposited 9 ETH and now it shows you the maximum DAI I can generate. So this is the maximum that the system is going to allow me to generate. So if I type that in, so this is too much to be fair. So this is a vault below the liquidation threshold and this is one key part that you don't want to do. All right, so now that I put down 9 ETH, the maximum amount of DAI I can generate, it tells me here, is a 1005 DAI. But I don't really recommend it. I don't recommend you type the max because if the value of Ethereum drops, you're going to face liquidation. And this pretty much works in the same way that say a bank will work. Say if you collateralize your house and you take out a loan on your house. But what if your house prices drops? What if it keeps dropping? At a certain point, the bank's going to get scared and they're going to send those liquidators in and just sell off your house, maybe while they're inside. That's exactly what's going to happen on Ethereum as well. So on MakerDAO, instead of having a physical bank with real people inside, it's all based on smart contracts. And what happens here, they'll just show you something called the liquidation price, is that if Ethereum drops below this price, then you're going to be automatically liquidated. And not only are you going to lose and you're going to sell off your ETH, you're also going to lose 13% in liquidation fees. They just want to discourage you from being ultra aggressive like that. So right now, even with Ethereum prices sitting at $3, $317, if you take out this much, yeah, you're going to get instantly liquidated and you're going to just start losing Ethereum and everyone's going to be sad. So typically speaking, what some people do is they take off, say something like $1,000 in terms of DAI. So we're talking about that one to three ratio a little bit earlier, but something like this would make sense. Now it shows you, okay, this is your collateralization factor, which means that you're overly collateralized, you're depositing more than you're taking out. And at the same time, it will also show you your liquidation price. So this is the price at which you will get liquidated. So you have to kind of almost remember this number. So if Ethereum does start dropping, you never want it to hit this number, you always want to return that DAI, the loan of that DAI before it hits this number. In terms of the other stuff, you have the stability fee, which is zero because you're generating with ETH. But on some other coins, you might be charged the fee as well for this transaction. And yeah, we're just we're pretty much all set on these numbers here. And I'm good to go. So this is the final confirmation that this is happening. Agree. And you can now open the vault, create the vault and start. Whoa, that's an expensive transaction. Yet again, I'm doing this for you guys, guys. So that's, that's type 72, 73 actually 73 gas because the gas is expensive right now. Let's confirm and start creating that vault. All right, this time was much faster confirmed. Let's see new transaction details. Successful confirmation. Yet again, the gas, the actual gas usage was a little bit less. So it's at $13. Still a little bit steep though. I really hate paying anything more than a dollar in fees. So anyways, let's exit. Vault is being created. Let's refresh this page rather. That makes more sense. All right. So now it's all done. You can see that on my wallet, the amount of Ethereum I have has been reduced. Nine ETH has been sent away, but I don't see my DAI token. And that's because for some reason, MetaMask doesn't add it automatically. So what I have to do, I just have to search for it, search for DAI, click next, and we got it. We also have the 1000 DAI in my account right now. And I can spend it as I wish. I can transfer it to Binance. I can send it to a smart contract and trade with it on balancer. Yeah, it's pretty much like just functionally as if it's a thousand US dollars sitting in my bank account. Now, the other interface that also tells you here, I can come back to this vault at any time. It's quite important for me to do so because it also tells me the live feed of when my collateralization, when, how much collateral I have and when my liquidation prices. So I have precisely 166.66. I'm not sure if that's a good or bad omen or not, but that's my liquidation price. So if Ethereum drops to this price, then yeah, I'm in trouble. If it drops below this price, I'm going to get liquidated. I'm going to lose. So someone's going to come in, take that Ethereum that I deposited at nine ETH. They're going to sell it, pay back the DAI and I'm going to eat 13% in fees. So you definitely don't want that happening. Now, at this point, if Ethereum goes up, I can take out additional DAI. So because Ethereum goes up in value, then I have more collateralization factor. I can come back and also generate more DAI, or I can also pay back the loan. So if I have the payback option, I can just take back the entire amount and then boom, it's gone. And I can just withdraw my Ethereum as well. We talked about using a higher collateralization factor. So we have more ETH stored up in there to make sure that we don't face liquidation, but also at the same time, that DAI value holds constant because there's always more value worth of ETH in the vaults of MakerDAO. Now, what makes this special, obviously, is that it's done by smart contracts. So it's not held by a single entity or person, rather it's held by lines of code. Now, this has some very strong advantages being it's more transparent. So we can see exactly how much is in those vaults. And of course, there's no one party central party risk where someone just robs the whole thing. But at the same time, that being said, if this contract is not vetted correctly, if there are vulnerabilities in this contract, then hackers might try to take advantage of it. So this is one of the biggest ups and downs of using all these smart contracts. Lastly, I want to chime in a few views here. So for the longest time on this channel, I did not talk about the DAI or the MakerDAO. And this is because I was personally a little bit afraid of it. Because of the fact that I know cryptocurrency prices are so volatile, I survived through 2017, where there was a flash crash for one split moment of time when Ethereum prices fell to nearly zero. So if that was the case, then how much would DAI be worth if all the Ethereum in the world can't save it, right? Now, of course, those are freak accidents. And that was mostly caused by a glitch on Coinbase. So as exchanges get better, and as systems like this take place, these risks start getting reduced over time, which is why I'm talking about DAI now. So there's a drastic reduction in the risk of flash crashes. Second of all, I think it's very important to talk about DAI right now, because we have more and more USDT being created, and that presents a huge risk. So right now, at $10 billion worth of tether in this world, it's too much power in one person's hands. And this is why having a decentralized stablecoin really matters at this current point. And it's getting a lot of clout for that exact same reason. There's more and more DAI being printed every day. Let me just show you the graph for that. So more and more people are locking up their ETH, minting DAI, and DAI is becoming, at trading at a premium because people are just loving it. So if you look at the one-year chart, looking at the supply of DAI, you can see that growing over from 2017, it was only a very small amount, only 3 million. That sounds like nothing today. But right now we're pushing all the way up to 300 million. So a hundred times more DAI being created as people become more and more confident in DAI. Now something else, lastly with DAI that's very interesting is tax. So I know this tax is very different around the world, but in some certain legal jurisdictions, when you cash out of crypto, you have to report it. So if you have exposure, you cash out from crypto to US dollar, you got to start reporting that and to the IRS or to the government, and you might get taxed on that. Now the interesting thing about DAI is that DAI isn't really USD exposure. There's no US dollars, physical US dollars backing the DAI, which is almost like a legal loophole, I guess. So some people, when they exit to DAI, if they kind of sell up, take profit, sell particular coins and exit to DAI, that's actually not considered as a reportable transaction, so to speak. So this depends on the different legal jurisdictions and something very interesting for you guys to look into. If you have this issue, definitely speak to a tax lawyer about that. I'm not a tax lawyer, but I'm just telling you that it's out there. Anyways, that concludes my thoughts about DAI. I definitely think that throughout the past few years, because cryptocurrency prices have stabilized and because centralized exchanges have also, I guess, in many senses, just more of them. So that's good. We're not relying on one very, very big one, we're relying on a few big ones. And that has led to a case where flash crashes due to exchanges are less likely, and something like the DAI is becoming more and more prevalent and becoming more preferred, especially in the decentralized finance scene. I've also shown you guys how to create your own DAI if you ever need to do so. And if you have any questions, just shoot them down below about DAI, about the whole system, about what I think. I definitely feel like this is something very amazing going forward. And I kind of almost regret for choosing not to talk about it for the longest period of time. And lastly, guys, how do you win one of these shirts? So these shirts are arriving this week, and we're going to do a giveaway for them. So all you have to do to get one of these shirts is when a new video gets released within the first 12 hours, this is very important, type hashtag notification squad. So you got to be fast, you got to make sure you're subscribed and have the notification bell or otherwise you're going to miss it. And with that, guys, thank you guys so much for watching this video. See you guys in the next one.