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I first heard about Maker DAO and Collateral Debt Positions (CDP) in February 2019, at Blockchain Africa, when Carel De Jager spoke about stable coins. CDP is a smart contract that allows users to lock up their Ether and then gives them the facility to withdraw a crypto loan from that asset, in the form of the USD stable coin, DAI. The CDP also has the concept of Wrapped Ether (Weth), that converts Ether to an ERC-20 token, making it easier to work with. Users must have 150% of the withdrawn amount available in collateral.

In this article, I share further details about my experience with creating a CDP in a volatile crypto market, and how the CDP can be used for wealth creation and Capital protection.

My CDP had a total of 5.9 ETH locked up, which roughly equated to 1533 USD on 13 June 2019. I had withdrawn 400 DAI and accumulated a collaterisation ratio of 383% which was outside of the liquidation zone of 150% collaterisation. In a rising cryptocurrency market when the prices are in a strong uptrend, this is an ideal situation. By 26 June 2019, the Ether price had risen from 259 USD to 329 USD, so I earned a double digit return on my asset and also the leverage I had obtained from taking a loan. This is the ideal wealth creation scenario and one that can be very profitable in a rising crypto market.

Please note that the amount that is withdrawn from the CDP is also subject to a stability fee. The stability fee functions similar to interest on a bank loan, helping to ensure that the price of DAI remains stable in relation to the US Dollar. When I opened the CDP on 9 April 2019, the stability fee was 7.5%. By 28 April 2019, it had risen to 16.5% and, by July 2019, it was 18.5%. The increase in fee was used to counter the steep rise in the price of Ether and ensure that the value of DAI remained stable in relation to the US Dollar.

I then decided to generate 360 USD more in DAI, as I thought that 1 Ether was going to reach at least 500 USD, and I would comfortably be able to manage the debt. I took the DAI, bought Ether, and then bought Bitcoin with the Ether. I then transferred the Bitcoin to the Deribit platform to start trading Bitcoin options. I had used my borrowed funds to do options trading. I did not consider this risky because of the rising crypto prices and because I was taking very conservative and low risk options trades.

The price of Ether was very positive, but then it slowly started going down in price. It went down to 227 USD on 14 July 2019 and my collaterisation ratio reached 156% – dangerously close to the 150% liquidation ratio. I needed to pay back DAI in order to increase my collaterisation ratio, but had no Ether in my wallet to purchase DAI. I had to exchange Bitcoin to Ether, and then transfer to my Metamask wallet. Once I had Ether in my Metamask wallet, I could purchase the DAI, and then pay back the DAI I had borrowed from the CDP.

The 200 DAI pushed my collaterisation ratio to 185% but, by 16 July 2019, the Ether price had dropped to USD and – once again – my collaterisation ratio was 156%. I was deeply concerned at this stage, because my technical analysis of the price charts revealed that the price seemed to have started a downtrend. I decided to pay back all the DAI so that my assets were not vulnerable to liquidation. Once I had paid back the DAI, I also withdrew half my Ether from the CDP and converted it to DAI. This was a capital protection strategy where I wanted to move some of my funds to the dollar based stable coin so that if the price of Ether continued to fall, then at least part of my funds would not be affected. The price of Ether did rise to 229 USD, but I still kept to the strategy of keeping part of my funds in the DAI stable coin.

The ownership of a CDP is beneficial, but great care needs to be taken to manage the volatility. After my experience, I would use the CDP to store my assets but only borrow up to a 300% collaterisation ratio. More Ether can be purchased with the DAI and this is how earnings leverage can be gained.

If the price rises, then the borrowed Ether can be converted to DAI to lock in the gain. CDP is a useful concept but if you don’t have the time to manage them then you can get easily liquidated. I will definitely continue to make use of a CDP, because it allows me to keep the asset, but I can also leverage some of the value of it in the form of a loan.