Ethereum (ETH) Flows into Financing Operations
Maker’s DAI is becoming one of the more influential digital assets, but other schemes to gain Ethereum (ETH) as collateral.
Ethereum (ETH) gained a massive new use case in the past year - as the chief collateral in decentralized finance schemes. The most notable one, Maker DAO, produces the DAI stablecoin, which grew its supply more than 20 times in the past 18 months.
During peak times, the Maker DAO held as much as 2% of the ETH supply as collateral. Now, the organization holds around 1.3% of all ETH, to the tune of 1.5 million coins. The collateral is usually supplying more ETH value than the DAI issued, making the stablecoin over-collateralized for extra security.
Producing DAI allows ETH holders to generate more liquidity and influence in the crypto ecosystem, while keeping access to their ETH. So far, DAI has not gone through catastrophic events that would destroy or devalue the collateral. This is made possible by the relatively stable ETH market price, which hovers close to $200.
The DAI coin has a $17 million’s equivalent of trading in 24 hours, a small fraction of ETH trading. Still, the coin allows ETH users to gain liquidity.
Critics of the schemes state that generating DAI and DAI-based lending are not productive ways to use digital assets, and instead rely on a pyramid structure. Still, the possibility for decentralized finance allows owners of ETH to gain returns, instead of passively owning coins.
More recently added ETH-collateral finance organizations include MolochDAO, as well as Compound. The appearance of new organizations to compete with Maker DAO means in the past few months, the DAI collateral has diminished, and the rate of over-collateralization has dropped to around 330%, down from 500% in May. MKR market prices have also fallen to $518.35, down from peaks above $700.
But it turns out the DAI is one of the most influential algorithmic coins:
And while there are other decentralized finance and crypto lending schemes, the DAI seems central to receiving gains from ETH.
DAI-based finance may be lucrative, but awareness is also needed, as scams may prey on the recent DeFi trend. Currently, it is unknown how much ETH is locked in DeFi entities and lending schemes. However, there is indeed a shift in ETH usage, from being the fuel for startups and a utility token, to a store of value and the basis of crypto-based finance innovation.