How Multi-Collateral Dai can impact DEX margin trading

DevCon 5 is in full swing and MakerDAO has announced the release date to one of their most anticipated features. Starting November 18th, their decentralized stable coin, Dai will be known as Multi-Collateral Dai (MCD) which can be created with more than just Eth tokens. 

Holders of DAI will need to upgrade their Single-Collateral Dai (SAI) to MCD when it is released, otherwise they will be “subject to emergency shutdown.” Maker has listed the steps for doing so on their Github

Short recap of Dai

When Dai was released, many people used it as an alternative for taking out a mortgage, as the interest rates were much lower than taking out traditional banking loans. As time went on, the value of Dai was too often under the dollar peg. Maker associated the falling value of Dai with a need to cap supply and eventually increased the fee for creating DAI to upwards of 19%.  

More recently, Maker has been able to decrease the fee for creating Dai. This could be partly because a Coinbase listing making it more accessible purchase and hold, or because of its increased usage on decentralized exchanges. 

How it can affect the present 

Currently, the price of Dai is sitting above $1.  Maker could use some more people taking Dai loans out as the Eth value locked in Maker has dropped from $500 million to around $280 million. 

Dai pairs on decentralized exchange, DyDx are more popular than their USDC counterpart even though Dai borrowing interest rates are higher. DyDx lets users trade with up to 4x margin using the 0x and eth2dai protocols (liquidity pools). 

APR for borrowing Dai on DyDx is currently around 9%, but the exchange says interest is scalable depending on market utilizations. This means that as the amount of borrowed Dai gets closer to the Dai available to lend, interest rates will increase. 

If more Dai is created as more types of currencies are accepted as collateral, some of the Dai will likely end up on exchanges. The more unused Dai in the lending pool of DyDx, the more competitive margin fees will be in comparison to BitMex.

TLDR 

We’ll still have to wait for decentralized credit scores to bring crypto loans to the average consumer. Many people are under the impression that decentralized loans only suit the needs of speculators, but Multi-Collateral Dai can improve that niche field.

Locked value in decentralized finance never felt the capitulation that tokens did, but it has had a bit of a slump in the past months. Because of this, it’s a good time for innovation to help Maker lock up some more coins.

How can Coinbase pay you interest and is it worth it?

Today, Coinbase announced that some U.S. holders of USD Coin will earn 1.25% APR per coin on their platform. Earning interest isn’t new in the crypto space. Plenty of other websites offer more interest for holding the same USDC, but it is a debut feature for Coinbase. 

Why am I able to earn interest on USDC? 

Circle, who created the UDSC product claims on their website that U.S. dollars backing USDC are held in reserve by regulated financial institutions. This, along with there being no records of Coinbase being in the business of lending implies that the financial institutions holding the backing for USDC are paying Coinbase higher than 1.25% interest. 

According to Coindesk, a Coinbase representative said that 1.25% interest is higher than most will receive from a savings account. 

“Speaking to the inspiration behind the USDC Rewards program, Branzburg noted that a 1.25 percent interest rate on holdings of U.S. dollars is “15 times more than the national average or what people might get through a [traditional] savings account.”

So unless those regulated financial institutions are giving Coinbase a generous savings account, the money backing USDC is likely in a CD account. According to smartasset.com, there is only one online bank offering 6 month CD rates over 1.25%. There are zero big banks offering 6 month CD rates over 1.25%. 

What this means is that the money backing up USDC is likely going to be tied up for more than six months to make paying interest profitable. 

What is the benefit of using Coinbase rather than higher paying sites? 

DYDX interest rates

Most decentralized exchanges will pay more than double what Coinbase will pay you, but moving the money around takes longer. There are no decentralized exchanges where you can convert directly to USD like you can on coinbase. 

A decentralized exchange is intended to be a forum to facilitate transactions between wallets.This can potentially make your transactions a bit slower and more time consuming. 

The only way to get USDC onto DYDX, a popular lending and borrowing platform is to use the MetaMask wallet. MetaMask app doesn’t let you deposit USDC by default, so you have to find USDC and enable it. 

From there, you deposit it into DYDX, but you will need to have some Ethereum in MetaMask to pay the gas fee. Once you would like to take the USDC out of DYDX, you need some more Eth for the gas fee. It will then be sent back to your MetaMask address, then you will pay another gas fee to transfer it to Coinbase. From there you can exchange it for fiat USD. 

On Coinbase, you will only have to purchase USDC with cash and then they will pay you interest.

To summarize 

There are many people who won’t go to the trouble of learning how a decentralized exchange or even a crypto wallet works. For those people, they are still going to earn more interest holding USDC on Coinbase than they would keeping USD in their savings account. 

As long as you can trust that the USDC product is in good hands, there doesn’t seem to be much to worry about. If something happened to where Coinbase needed to take out USDC backing and it was locked in a CD account, they would either have to dip into their personal bags or take out loans.