Kratika Agrawal
Reading Time: 3 minutes

I first heard about Makerdao 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 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) which converts Ether to an ERC-20 token to make it easier to work with it. Users must have 150% of the withdrawn amount in collateral. In this article I will give more details about my experience with creating a CDP in a volatile crypto market and how the CDP can be used practically 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 I had withdrawn 400 DAI and accumulated a collaterization ratio of 383% which was out of the liquidation zone of 150% collaterization. In a rising cryptocurrency market when the prices are in a strong uptrend then this is an ideal situation. By 26 June 2019 the Ether price had risen from 259 dollars to 329 dollars 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 which 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Please note that the amount that is withdrawn from the CDP is also subject to a stability fee.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 and helps 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 it had risen to 16.5% and by July 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 dollar.

I then decided to generate 360 dollars more in DAI as I thought that 1 Ether was going to reach at least 500 dollars 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 dollars on 14 July and my collaterization ratio reached 156% which was dangerously close to the 150% liquidation ratio. I needed to pay back DAI in order to increase my collaterization 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 collaterization ratio to 185% but by 16 July the Ether price had dropped to 199 dollars and once again my collaterization 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 dollars but I still kept to the strategy of keeping part of my funds in the DAI stable coin.

In conclusion 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% collaterization 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.

-John Singh

(Excerpt) Read more Here | 2019-07-31 08:23:49
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