Whether you are just getting into DeFi or have been here from the very beginning, with the ever-expanding nature of the ecosystem its impossible to keep up with every new coin, protocol, and strategy. However, there are certain coins that are essential for everyone to know how to use, and Dai is without a doubt one of those coins. So, without further ado here is your one-stop-shop to everything Dai.
Obtaining Dai
You can’t profit off your Dai if you don’t have some first, so let’s run through some quick steps on how to turn your money into Dai.
The first step is to buy Dai which you can do on Coinbase. COINBASE allows you to convert your dollars directly into Dai with limited fees (you will never be charged more than 0.5% fees on your conversions).
Next, you will want to set up a wallet to hold your Dai and any other cryptocurrency you plan on acquiring in the future. Coinbase has its own wallet (Coinbase Wallet), but there are many out there like Metamask, Trust Wallet, and Ledger just to name a few. You can transfer your Dai into one of these wallets in the steps outlined here. Now that you have Dai let’s get into some strategies on profiting.
Why?: If you’re looking for a super-easy way of profiting off Dai look no further. This strategy is easy to understand and could get you some sizable returns.
How?: The idea here is simple: you trade your Dai for another asset, like ETH whose price is subject to change. If the price of ETH (or any other token you’re investing in) goes up you make a profit, if it goes down you don’t.
Risks: As you trade you may get some sense of patterns with how crypto moves, but there is always a risk of the volatile asset losing value and you losing money as a result so be careful.
The chart above should give you an idea of just how much money can be made or lost through ETH. The price of ETH often makes large jumps in both directions, opening a place for you to make a lot of money (or lose a lot) if your timing is right.
Why?: Margin trading can give you the exposure to the profit of up to 5 times the ETH (on dYdX) than basic trading does. This means if you choose to margin trade you can make up to 5 times more money (or lose 5 times your money)than someone basic trading with the same amount.
How?: You start by borrowing Dai. You can use dYdX and Compound Finance which both have borrowing features to do this. To borrow Dai you need to lock ETH with 150% (this can vary based on the protocol) of the value of the Dai you are borrowing as collateral. I know this might not make sense but bear with me.
You are then going to trade you borrowed Dai for more ETH. You can stop here, or you can swap the Dai you just borrowed for ETH and repeat the steps to get more exposure.
You’re betting on the fact that ETH will go up in value, and if it does, the ETH you are holding and all of your locked ETH becomes more valuable. Initially, you used ETH worth 150% of the Dai you borrowed. Now that same ETH is worth say 175% of the borrowed Dai, and all you need to do to get it back is repay the Dai and you get that extra 25% in profits. If you repeated the steps you will profit even more.
Risks: The main risk here comes with that ETH collateral. Increasing your exposure to ETH also opens you up to greater losses if the price of ETH goes down. If ETH goes below a certain percentage of its original value the contract will automatically sell your collateral to repay the debt you owe in what is called a liquidation. You will also be charged a fee on top of that. This risk is very serious and for the most part out of your control as you can not predict the movement of volatile assets one hundred percent of the time.
Why?: Lending is probably the safest strategy on this list, it also will get you a much higher interest rate than you can find at any bank. While banks offer annual returns that are often close to zero, with the highest currently at 1.3%, lending will generally give you returns in the range of 3%–15%. The average returns from two protocols, Compound and dYdX, can be seen in the graph below.
How?: You lend your Dai to a dApp, where it will be used similarly to how a bank would use fiat currency. Compound and dYdX both offer lending, and both have rather simple user interfaces. This should facilitate depositing and removing your assets with ease. At any point you can choose to remove your Dai, and for your service, you will receive a profit depending on how long your money was lent out and what the rates looked like in that period.
Risks: The only real risk at factor here is bugs with smart contracts, which can lead to you losing your money. This has only happened on bZx exchange and is in no way a frequent occurrence.
Why?: Going into liquidity pools can get you some great returns, but liquidity pools also come with a substantial amount of risk. To quantify the type of returns possible, the best liquidity pool as I am writing this can get you 26.1% annual returns. You can find the best liquidity pools here.
How?: You enter the pool with two coins at equal value. If you wanted to put 100 Dai into an ETH-Dai pool you would need 100 Dai and however much ETH 100 Dai can get you but keep in mind once you enter that 50/50 ratio will begin to shift. You might end up with 75/25, but the total value should still be equal to 100% of what you began with.
This shift occurs because you as a pool member are providing liquidity for an automated market maker, this means people can trade the tokens that the pool is made up of into and out of the pool. When this happens your initial 50/50 deposit will shift one way or the other. This may not sound ideal, but your profit as a pool member comes from the fees paid when people trade with the pool. The shift these trades cause on your assets might not be to your liking, but the more trades that occur the more money you will make.
Risks: Liquidity pools have better returns than lending, so why not just join pools? Well, liquidity pools come with a big risk called impermanent loss. You can learn more about what is actually happening when impermanent loss occurs here, but the main idea is that when the price of a token like ETH goes up it will be worth more outside of the pool than inside. This means that the ETH you put into the pool is underperforming compared to the same amount of ETH outside of the pool.
This is a small issue that creates a bigger one because impermanent loss can be turned into permanent loss by outsiders. The pool in its nature is setting up a market for people to trade two tokens easily, but when outside prices change and a volatile token is undervalued in the pool people can trade for it and flip it externally for a profit. These people are called arbitrage traders. That profit will come straight out of the pool member’s pockets.
Additional info: There is one protocol called Balancer that allows users to decrease impairment loss through uneven pooling. It allows users to go into a pool with uneven ratios of assets. While you usually go in 50/50 on Balancer you can go in 80/20 or a number of other ratios. By doing this it will decrease the potential of impermanent loss, for more on this check out this article.
Additional info: Keep in mind that data collected at the time of writing this and will vary in the future. Fund or set history and analytics are always available to the public on both Melon Protocol and Token Sets. Trusting your money to someone else, as should be clear from this data, can lead to great profits as well as great losses.
Closing
There are a lot of great ways to profit off your Dai right now, and there are a lot more coming. I hope this post highlighted some ways you could be making money and I hope you continue to research further as there is a lot to be done with crypto and the absolute best strategy for making money through cryptocurrency is to make yourself as knowledgeable as you can on the subject.
