How to

MakerDAO: learn how to create your own stablecoin

Key facts:
  • The use of Metamask is necessary to interact with the platform.

  • DAI, its token, is a crypto asset that operates under the ERC-20 protocol of the Ethereum network.

IMPORTANT: In this guide, it will be necessary to use Metamask to interact with the platform. So if you don’t have one, I urge you to check out this guide before proceeding.

There is a clear trend in today’s computer world, and that is that more and more areas are joining the decentralization trend. On this occasion, it was the turn of the financial sector MakerDao.

Before we get into the tutorial, let’s take a moment to understand what MakerDao is and how it works. It is a decentralized platform that created a token capable of maintaining 1:1 parity with the dollar. However, this does not work like the typical custodian model of stablecoins or anchored cryptoassets, such as Tether, where the company must back each token issued with real money.

DAI, as the token is called, is a crypto asset that works under the ERC-20 protocol of the Ethereum network. The token in question uses a concept called the collateralization ratio, where the price of each is YES AND (remembering that it is 1:1 with the dollar) It is fixed by depositing in ETH to a smart contract called CDP (Guaranteed Debt Position, for its acronym in English).

As we can see, there are several new concepts used in this field. Therefore, and because of this, it is necessary to clarify some concepts present in the platform and some differences with known concepts from the crypto world.

What is a stablecoin or a pegged crypto-asset?

According to the definition we can find in this article about anchored cryptoassets, they are digital assets designed “to maintain a constant price. Accordingly, they are linked to stable fiat currency or secured by products or other cryptocurrencies. “They emerged as a way to counter the volatility of crypto assets.”

Now, as the definition just quoted, There are two ways to keep the price of crypto assets relatively stable.: one is to link it to a fiat currency – with in the example of Tether – and the other is to collateralize it with a cryptocurrency, which in the case of DAI will be Ether (ETH).

The difference between both forms of stabilization lies in the degree of decentralization that one can have over the other. Considering that with Tether only one entity can issue new tokens, decentralization does not exist. On the other hand, the DAI token is generated by anyone and just needs to be backed up to ETH. From there, through a smart contract, new tokens can be generated.

What is MakerDAO and how does it work?

At the beginning, I told you that MakerDAO is a decentralized platform, which aims to develop the potential of crypto-asset technology through stable money. He mentioned it himself company slogan.

Since it is a decentralized platform, it is managed by a community of users; but how do they do it? Well, thanks to the use of its own cryptocurrency, called Maker (MKR). Any significant change made within the mentioned platform is approved by MKR owners by voting.

What is CDP and how does it work?

CDP is an acronym for Collateralized Debt Position, which enables the issuance of new DAI. In more technical terms, CDP is the Ethereum smart contract from which DAI is generateddepending on the amount of collateral deposited.

Therefore, when we create a CDP, it locks the balance or, in other words, deposits it until we close the position. Starting with the deposited amount is where DAI will be issued. This mechanism also allows deposits to be made after the CDP is created, thus increasing the quota of DAI we can generate.

To close the CDP, it is necessary to pay the equivalent of all generated DAI, as well as an annual interest set by the platform itself (currently 1%), which can be paid in DAI or MRK.. With all this, we close the CDP and the ETH escrow returns to our wallet again.

What is the collateralization ratio?

This refers to the relationship that the amount of DAI we will issue will have, based on the dollar value of the ETH deposited.

First, and as a way to mitigate any excessive growth or decline in ETH price, every connection is over-guaranteed, that is, it does not retain the value 1:1. For example. If I deposit $100 in ETH, I won’t get 100 DAI. The amount in DAI that we will receive through each deposit is calculated using a concept called: the collateralization coefficient, which is expressed as a percentage to define the exchange.

To further clarify this concept, imagine the following: we deposit 1 ETH with a market value of 100 USD and a collateralization ratio of 150%. To know how much DAI we will get, or how much it is possible to generate, we have to divide the deposited amount by the collateralization coefficient and we will get approximately 66 DAI.

Once we are clear with all the concepts, we can start using the platform. I also guarantee that if you’ve learned each one and what they’re based on, the platform will be super easy to use.

Creating a CDP

The first step in creating our cryptoasset anchored in MakerDAO is to create a CDP, which is a smart contract that allows the generation of new DAI. To do that we have to go to the portal cdp.makerdao.com

Source: MakerDAO.

First, we need to connect the Metamask wallet to MakerDAO by clicking on the corresponding icon on the right.

Source: MakerDAO.

Then a popup from Metamask wallet will appear, in which authorization is requested to connect the wallet to the platform. Then we would have to select the connection option.

Source: MakerDAO.

What we see in the previous image is our ready session. In the central part we have a button to create a CDP, and on the right side are the balances in the Metamask wallet. In the lower right part you can see some quotes of different cryptoassets managed by the platform. We will also find the global CDP collateralization, which is the global average of the collateralization ratio between all ETH deposited on the platform and DAI issued.

The next step to create a CDP is to click on Open CDP.

The amount we can generate in DAI will depend on how much ETH we deposit. Source: MakerDAO.

Here we will only need to add two things: the initial amount of ETH that we will deposit as collateral and the amount of DAI to generate. Of course, the amount of DAI will completely depend on the amount in ETH, taking into account security ratio, which has a minimum of 150%. Likewise, the current minimum amount to create a CDP is approximately 0.0053 ETH.

We then put the amount in ETH and the amount of DAI to be generated, assuming each maintains a 1:1 relationship with the dollar.

Source: MakerDAO.

Before creating a CDP we will look at the following:

It’s in the red box indicator Liquidation price (ETH/USD), which refers to the price to which ETH must fall, relative to the dollar, for the CDP to be automatically liquidated. In other words: we lose the deposit. Likewise, this price will vary depending on the collateralization relationship we maintain. In the same field we have the current price of ETH and the penalty fee which is 13% of the total deposited. This means that if the CDP were to close, we would be charged 13% of the DAI generated.

Two things must be taken into account: the first is that the liquidation refers to the closing of the CDP and the loss of the guarantee deposit, but not to the generated DAI, which will still be stored in our wallet. Another thing to consider is that this process happens in very extreme cases; because, if we see in the picture, the price should fall to $0.28 to liquidate.

As for the green box, we will see the collateralization ratio. This refers to the ratio between the ETH deposit and the DAI we generate, also knowing that the minimum is 150%. but the smaller the share, the higher the liquidation price.

We just have to click on Collateralize & Generate DAI.

Source: MakerDAO.

The next thing is to confirm that all the details are correct and after that, after reading and accepting the terms of service, tick the appropriate box. Then we have to click on Finalize and create CDP, which will open the Metamask window where we will confirm the payment to create the CDP.

Source: MakerDAO.

At this point, all that remains is to wait for the CDP creation process to complete.

If we see that the process is taking some time, we can refresh the page. Source: MakerDAO.

After we complete all these steps, the process would be complete and we will create a CDP.

Source: MakerDAO.

CDP research

In the previous image, we saw our CDP created. Now let’s see the different options we will have.

Source: MakerDAO.

If we look at the previous image, at the top we keep the details about the CDP that we saw at the beginning, but, in addition to this, we will have 2 pairs of options that allow us to interact with it.

Within the red box we have options related to ETH collateral, which refers to the currency that collateralizes the price of DAI – in this case it is ETH-. Here we will have 2 options: the first is a deposit, which allows us to transfer ETH to our CDP. In this way, we can increase the guarantee deposit that we initially paid and, consequently, increase the amount of DAI we can issue. On the other hand, the Withdrawal option allows withdrawal, but only if there is a previous deposit, as it is not possible to withdraw the amount with which the CDP was created.

In the green box we have options related to DAI. The first is Payback, which allows you to pay back – or burn, which would be the correct term – the DAI generated. Since closing CDP requires returning all DAI created; either at CDP generation or later. Another option available is Generate, which allows us to issue a new DAI. Of course, it will be possible depending on the Max. available for generation, which is a direct reference to the collateralization relationship.

To finish the explanation, in the lower part we will find the CDP history, where a record of all movements made since its creation is saved.

Sending and receiving DAI

At this moment, there are already DAI available in our Metamask wallet since the creation of the CDP, although it is not yet possible to send them, because we need to enable this option first.

If we look at the right side, where they show us the different states of the Metamask portfolio, we will see a padlock symbol on the DAI portfolio that we will click on.

Source: MakerDAO.

We will then need to confirm the transaction that will enable the specified option and, when it is confirmed, we will see how it changes the symbolindicating that delivery is now possible.

To send a shipment, you just need to click on the paper airplane icon.

Source: MakerDAO.

Where it says Amount, in the upper right part of the image, we will need to enter the amount to send along with the destination address. This must be an Ethereum address, remembering that we are using a token from that platform. Then we continue by clicking on Send to later confirm the transaction from the Metamask wallet and that’s it.

To receive, we will share the Metamask wallet address and wait for the transaction to be confirmed.

DAI generation

First of all, we must remember that DAI can be generated as long as the collateralization ratio remains above 150%. Now, to issue a new DAI, we need to go to the Generate DAI option.

Source: MakerDAO.

In the box that we see in the upper right part of the screen, we will enter only the amount of DAI that needs to be issued. At the bottom we will see what the liquidation price will look like, along with the collateralization ratio; taking into account that as we generate more DAI, it decreases and the price increases.

Finally, we will click on Generate, where we will have to confirm the transaction with Metamask, and that’s it, we will have new DAI available in the wallet.

Closing the CDP and returning the security deposit

The last thing left for us is to close the CDP and recover the ETH deposit, either the one we made at the beginning or later.

First of all, we must have Metamask in our portfolio balance in DAI equivalent to all previously generated DAI and an additional balance, either from DAI or MKR, to pay annual interest on the total amount used in the CDP. That is, we won’t be able to pay it with already generated DAI, because at closing we have to return the total amount of DAI we issued.

To start this part of the process we will go to the Close CDP option.

Source: MakerDAO.

Here, all we need to do is to choose the payment method of the commission, either in DAI or MKR, and click on Close.

Source: MakerDAO.

All that remains is to confirm the transaction of closing the contract and that’s it. All we have to do is wait for the execution of the smart contract and we will see how the funds we deposited in CDP will return to our portfolio.

Conclusions

The main adjective I would give the MakerDAO platform is: innovative. A platform that seeks to break free from custodial-type cryptoassets (which depend on fiat currency deposits), by securing costs. So They avoid any model of dependence on cryptocurrency and fiat currency it could exist.

It’s worth noting that, although it may not seem like it, this is a simple platform and very easy to use. The complicated part of it all is understanding the concepts of certain things, which usually ends up leading to rejection among users. But in general, with these well-defined concepts, we can interact with the platform without any problems.

As for the interface, it is fresh, simple and fast. Although, in full use we may have to update it more than once, as it doesn’t sync properly, but nothing that a few clicks to refresh the page won’t solve.

Finally, it seems to me that MakerDAO is a platform with a great future. Especially considering that it currently holds 2% of all issued ETH collateralized within it; thus showing the importance it has assumed since its launch.

You can watch the video tutorial of this guide on our YouTube channel:

Featured image by: AlekseyIvanov / stock.adobe.com

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