Proposed Ethereum MakerDao Investment Model

First, I would like to explain what the MakerDao is and then discus my profit making proposal.

Who is the MakerDao?
MakerDAO is a decentralized autonomous organization based platform that contains the maker coin (MKR) which acts as a governance coin, and the DAI which is a stable digital currency. The project was started in 2015 and did not conduct an ICO, instead choosing to privately sell MKR tokens to fund development over time. Maker’s DAI stable coin launched at the start of 2018

What is the MakerDao?
MakerDAO is basically a credit facility that issues loans with a certain interest rate called the stability fee against a collateral called Ethereum. The loans are paid to borrowers in Dai. Each Dai is worth one dollar USD. The stability fee or interest rate is raised to reduce selling pressure on the Dai and help keep it pegged to the dollar and vice versa. The DAI stability fee or interest rates for borrowers was 1%, but later the stability fee increased from 1% to 3.5%.

Who Controls the System?
The holders of the MakerDAO Token MKR token influence certain aspects of the protocol such as: What should the be the annual borrowing fee be (stability fee)?, How much collateral should be backing each CDP? (collateralization ratio) and Shutting down the protocol in the case of a sudden drop in the price of Ether or another situation (emergency shutdown)?

What does the MakerDao do and why are there so many transactions?
The MakerDao provides loans in Dai, against assets, mainly Ethereum and in some instances Bitcoin held by Bitgo.
For Example
If you deposit one Ethereum worth $150 USD in the MakerDao you can ask for a 50 Dai loan and 50 Dai is worth 50 dollars USD. Your asset, the Ethereum, is held as collateral and you get it back when you repay the loan. This process of depositing your Ethereum as collateral and getting a loan is known as collateralization. The ratio of collateral to loan is $150/$50 or 3:1. This is called your collateralization ratio. The minimum ratio is 1.5. If the price of Ethereum falls, your ratio will fall. Once the dollar value ration of your Ethereum collateral gets to 1.5 your Ethereum collateral will be liquidated or sold to pay back your loan.

Why Collateralize your Ethereum?
As an investor your rate of return on Ethereum is variable, for example if the price for Ethereum increased 5% in one month your ROI was 5%. If you owned $100 worth of Ethereum your 5% ROI was worth $5 USD. But what if you owned 10 times as much Ethereum? $1000 worth of Ethereum at a 5% ROI would mean $50 USD. If you had 100 times as much Ethereum your 5% ROI would be worth $500 USD.nSo to make more money, you need to buy more Ethereum. But with collateralization you can buy more Ethereum without having more money.

Now on to my plan
My next diversification plan is to invest in a small amount of Ethereum and utilize the MakerDao to increase the amount of Ethereum appreciating in my account by 100% using the Collateralized Debt Product or CDP on the Ethereum blockchain.
This is my investment model and it’s success or failure will determine if this concept works in the real world. This is the model or concept:

I buy and ten Ethereum worth $1500 USD.
I deposit $1500 worth of Ethereum in the MakerDao.
I can now borrow 750 Dai, using my $1500 worth of Ethereum as collateral. The interest rate is 3.5% per annum.
I then exchange 750 Dai for $750 USD on the exchange.
I then buy $750 dollars worth of additional Ethereum.
I deposit this additional $750 worth of Ethereum in my MakerDao account.
Now I own $2250 dollars worth of Ethereum.

So by using the MakerDao CDP collateralized debt product, I am able to increase the amount of Ethereum I hold from $1500 to $2250, a 50% increase, but without investing any additional capitol.

While I pay 3.5% interest on the additional $750 worth of Ethereum, as long as Ethereum appreciates at greater then 3.5% per year I still get a positive ROI without increasing my capitol invested.

Plus if I add to my Ethereum holdings by using the CDP again to borrow half of what I deposit, I can borrow an additional $375 when I deposit 750, then borrow $187.5 when I deposit 350, borrow $93.75 when I deposit 187.5 and $46.87 Dai when I deposit 93.75, each time I convert to Dai to dollars and then buy more Ethereum.

Here’s the numbers.

Start with $1500
Borrow 750
Borrow 375
Borrow 187.5
Borrow 93.75
Borrow 46.87
Total $2,9353.12

So I start by buying $1500 worth of Ethereum and using the CDP I am able to buy $1,453.12 in DAI additional Ethereum using loans with interest of 3.5% per annum.

So I can earn yearly appreciation on twice as much Ethereum while paying 3.5% and investing time to set this up, and monitoring the price of Ethereum.

Each time I deposit the additional Ethereal in my MakerDao account to increase my Ethereum holdings. As you can see I could end up with close to $3000 dollars worth of Ethereum in my MakerDao Account with only a $1500 dollar investment.

There is a potential downside

Now, I could get wrecked if Ethereum crashes more then 50% and I do nothing and get liquidated. Then I could lose half my banked Ethereum. But since that means I ending up with close to my original investment back, minus the liquidation fee I think it’s not as risky as it sounds. Plus, if Ethereum price starts to crash, I can always add to my Ethereum deposits during such a crash. Since I borrow 1/2 of what I deposit, I can easily stay above the 1.5 ratio of deposits to debt with additional deposits.
That’s my investment model.

What do you think?

✍️ By Shortsegments