Introduction

Source

The Ethereum blockchain is a ledger that allows for more data to be stored in it continously. It was launched in 2015 by Vitalik Buterin to improve on the Bitcoin blockchain (first generation crypto currency) and creating a platform for distributed computing where programability is enabled, thereby making room for creating lots of other digital assets on the Ethereum blockchain. The Ethereum blockchain allows users to program their own codes and creat their own applications on the blockchain known as Decentralized application. Basically, Etherium is an open source network that seeks to innovate and improve on the bitcoin blockchain, it gave users the platform to create their own tokens. Etherium is the blockchain, and it has it's own coin/currency called Ether (ETH) which is used for transactions. Ether was launched alongside Ethereum blockchain in 2015.

MakerDAO

MakerDAO is one of the projects built on the Ethereum blockchain. MakerDAO collatetirized Debt Position (LDP) is a smart contract that runs on the Ethereum blockchain. It is made up of the Sai Stablecoin (now Dai Stablecoin), whose sole purpose is to create Dai in exchange for collateral which it in turn holds in escrow until the borrowed Dai is paid back.

The Dai Stablecoin is a Collateral backed crypto currency whose value is stable relative to US Dollar. The Dai credit system was developed by Maker's team of developers, economist, and designers from all over the world. The decentralized autonomous organization is governed by it's token holders.

The Collatetalized Debt Positions alter the total supply of outstanding Dai and create Dai when new assets are leveraged, then destroys the existing Dai when it is repaid to the position. The minting and burning allows the contract to account for the total supply of the stablecoin. This proves that the platform of backing collateral can always guarantee the value of Dai in circulation.

The Collatetalized Debt Position enables the generation of Dai Stablecoin against the Collateral (Currently ETH) that could be locked up in the CDP until the generated Dai is paid back.

How It Works

When you determine on how much ETH you want to lock up in the CDP, then you genertae Dai Stablecoin against the ETH you already locked up and send them as you wish, afterwards you pay back the Dai Stablecoin when you no longer need the liquidity together with a stability fee, then you can withdraw the locked collateral.

Risk Involved In Creating CDP

The primary risk associated with CDP owners is on maintaining a safe leverage Position in a highly unpredictable market.

The value of the locked ETH must be more than 150% of the Dai Stablecoin that had been generated, if the value of the locked collateral falls below 150%, the CDP will be liquidated. Here the collateral is automatically been sold by the system to cover the value of Dai Stablecoin that was generated.

How To Lower The Liquidity Risk

To secure your position as a CDP holder, the amount you borrowed must always be worth less significant compares to the amount staked. If your CDP is close to the liquidation price, you must either add more collateral or return Dai to reduce risk.

The best way to reduce your risk of liquidity is to repay Dai, as your liquidation decreases.

Benefits of Holding CDP

One can get liquidity by generating Dai Stablecoin without giving up ownership of your collateral, as long as you make sure that the CDP holds enough collateral to cover the value of the Dai Stablecoin.

Cost Implication Of CDP

There is a stability fee on the Dai Stablecoin of 8.50% per year. The fee is paid to Maker when you pay back the Dai. But if your CDP gets liquidated, there will be 13% liquidity penalty subtracted when the locked collateral is sold.

When To Pay Stability Fee

You pay your debt by returning Dai to your CDP. Your outstanding fee is proportional to the amount of Dai being returned. The fee is paid in maker tokens in the context, which serves as the utility token.

Conclusion

Thousands of projects had been created on the Ethereum blockchain platform over the years, which we could not discuss here. But for the homework rules sake, we have to talk about just one project. Meanwhile, if you missed the post lecture by @gbenga, you can check it out here.

@gbemga here is my homework submission post entry.

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