Top 3 crypto exchange in South Africa, AltCoinTrader, have today officially announced the listing of COMP and DAI tokens to their platform. This amidst the remarkable surge in DeFi interest in the industry.
As reported in a blog post on the website, “DeFi coins are the new money makers. Whilst Bitcoin is up 80% in the past three months, DeFi coins are up by more than 100%.”
DeFi or decentralised finance is the crypto industry’s answer to providing financing. By using the Ethereum blockchain, users can build various small financial tools and services in an open financial ecosystem that is both secure and decentralised. In essence, DeFi is a financial system that is independent of central authorities. For instance, you can take out a loan by using your cryptocurrencies as collateral and even lend your cryptocurrencies to someone at a given interest rate.
This is made possible thanks to the blockchain’s ability to verify each and every transaction.
What is Compound Token?
Compound.Finance allows user to earn interest as well as borrow assets against collateral value. The token’s website gives users an indication of what coins are available to borrow and at what interest rate they can lend their coins. At current rates, users could supply BAT tokens and earn 13.47% interest per annum. Conversely, users could borrow Ether at 2.03% per annum.
As per the AltCoinTrader blog…
Compound Token (COMP) is the ERC-20 asset that is used by the community to govern the Compound protocol. COMP Tokens give holders the power to propose and vote for specific protocols. It was decided to give power over the platform to the community to ensure good governance and make the platform truly decentralised. Furthermore, if you borrow or lend tokens on the Compound.Finance platform, you will also be a recipient of COMP Tokens. You may use these coins to trade and arbitrage or cast your vote when asked to make important decisions.
Forbes recently published an article titled “How Bitcoin may see an unexpected boost from a DeFi token bubble burst”. The author explains how migrating financial services to a decentralised platform may give Bitcoin a boost and act as an excellent use case for cryptocurrencies like Ethereum.
Compound Token outperforms Maker
Even though COMP Tokens have been around for a while, they were only recently released for trading. It was so well received by the market that it overtook Maker in terms of market cap. Compound’s market cap reached a billion dollars making it the new king of DeFi coins. Previously, Maker dominated almost half the DeFi space.
With Coinbase listing COMP Tokens on 19 June 2020, the price of COMP went from a low of $64.93 to an all-time high of $353.18 within 24 hours, highlighting just in demand this coin is.
DAI and Maker DAO
Dai (DAI) is a stablecoin that runs on the Ethereum network. The decentralised stablecoin aims to maintain a value of roughly $1. However, DAI is not backed by US dollars like in the case of Tether (USDT) but rather by collateral on Maker.
How does Dai maintain its value?
In order for the DAI to maintain a target price of $1, it relies on what is called the Target Rate Feedback Mechanism (TRFM).
Is explained in the AltCoinTrader blog post, this TRFM can be compared to a game whereby economic incentives are balanced to sustain a given value.
Thus, if the DAI should fall below $1, the ‘game’ will incentivise users in order to increase the value and vice versa. The further away the DAI is from $1, the greater the incentives will be to restore the price of the coin. These incentives are usually in the form of earning interest by holding DAI tokens to increase demand for the coin. On the other hand, to lower the supply of DAI, users can borrow DAI and buy from the market by means of a Centralised Debt Concept (CDP).
A CDP is a decentralised margin trading platform. It enables users to deposit a coin into a smart contract which is to be used as collateral for a loan. Again, this is a form of Decentralised Financing (DeFi). Once the CDP has your coins you put up as collateral, you will receive the loan equivalent (USD value) in DAI tokens, bearing in mind that one DAI equals $1. You can use this loan for anything you want like buying a house, to trade or as personal savings.
The smart contract that governs all of this is the Maker DAO platform built on the Ethereum blockchain. Two tokens are issued on the Maker platform namely DAI (as discussed) and Makercoin (MKR), where users can borrow and lend money on this platform. The system allows for community governance. IE. MKR token holders can vote on important issues that affect the platform making it truly decentralised. MKR coins act as payment for the ‘stability fee’ when taking out a loan. They are burned during the settling process. However, DAI is the main product on the Maker platform.
Can yYou Make Money With DAI?
Since the price of DAI will remain roughly $1 at all times, users can rest assured that they will owe as much as they borrow since there are no price fluctuations. If users deposit 1 ETH into a CDP and borrow 226 DAI (price of ETH at time of writing was $226), they will pay back 226 DAI plus interest. Once the debt has been settled, users will get their 1 ETH back.
According to AltCoinTrader’s blog post, market volatility will not impact the amount users owe. Users can make money with DAI by buying other coins and selling them at a profit. Since users have to pay back only the settlement amount, the profits made from a trade belong to the user.
DAI and COMP are both now available for trading on the South African platform.
For users looking to learn more about DeFi and its numerous benefits, they can watch the AltCoinTrader CEO Richard de Sousa’s YouTube video on the subject.
However, users can already deposit their COMP Tokens for trading today. If you would like to learn more about the benefits of DeFi and DeFi tokens, be sure to check out the Rads ACT YouTube page as Richard de Sousa goes into depth on the topic.