Spoiler alert: I wrote this post and performed these actions yesterday when ETH was trading at $160 and Bitcoin was trading at $7500.
I have been scrambling hard to scrape together more money this October because I've been predicting October as a local bottom for over 6 months now. Suffice to say I haven't been able to get as much as I was hoping for. I am especially incentivized to fill my bags more because Bitcoin has crashed to the $7500 level which is exactly what I was predicting in June, and November is traditionally the best month out of the year for price action.
However, I realized something just now.
I can give myself a loan, bitches!
I have just created Dai stable coin "out of thin air" using MakerDAO smart-contracts. I've reduced my collateral 100% from the safe 300% level to the quite unsafe 200% level.
If ETH crashes under 150% my collateral will be liquidated at a 13% penalty. This has already happened to me once and it sucked (and it was totally my fault). Funny thing about that is that Ethereum kept crashing so I actually saved money due to the liquidation giving me Dai stable-coin.
But what will you do with that self-granted loan?
Oh yeah... buy more Ethereum... duh!
Boom!
Now I've raised my collateral to 240%. Ethereum has to crash under $100 in order for me to be at risk of liquidation.
Not gonna happen.
The last time I made one of these leveraged trades Ethereum was at $140. I'm still a bit salty I didn't cash some out at $350 and pay off some of the loan but whatever. It's not going to crash back under $140, the market is so incredibly bottomed out right now.
I now realize that I actually have a negative hedge. I've always been thinking about it as if my hedge was 0%, but there is no point in holding a stable coin if I have this loan to pay off, especially considering the currently outrageous interest rate of 10%.
In the future services like this will obviously be 0%-1% interest. It's a race to the bottom. In fact, Steem could easily make a superior product to Maker once SMTs are fully flushed out. This would also finally fix SBD volatility once and for all.
And so there are obviously a lot of reasons why the MakerDAO platform is not ideal, but for now they are simply leveraging their first move advantage.
In my opinion, increasing the interest rates to change the average value of Dai is a mistake. If the market wants to devalue the Dai by 2 cents in order to leverage trade it, that should be allowed. If the MakerDAO wants the value of Dai to go up, they should be incentivizing hedgers rather than punishing makers.
Unfortunately, the incredibly centralized distribution of Maker coins creates difficulty here. Combined with zero competition we realize that we'll just need to wait for the market to develop.
There's also the possibility that I lose everything in my CDP due to error. Just recently a $50000 bug-bounty was cashed in on a future update that would have done just that. Fingers crossed on that front.
makerdao-bug-could-ve-let-hackers-steal-ethereum-powering-its-dai-stablecoin
The other big problems with the platform are that Ethereum is too slow during big crashes to even respond fast enough to increase the collateral ratio. The reason my CDP was liquidated back in the day was that I was essentially forced to take collateral out of the loan in order to sell it for Dai with the intent of using said Dai to increase the collateral percentage. The problem here is that my CDP got liquidated while I was doing this. There should have been a way to do it all at once without having to lose collateral on my CDP (although this would require a DEX mainline).
This is very annoying because the entire balance got liquidated, which was very unnecessary. If the network would have liquidated in smaller chunks I would have been fine... whatever, live and learn... it will get better in the future.
However...
It's clear to me that Maker is currently the top ERC-20 token by a wide margin. It has a working product that people use, which automatically makes it better than 99% of the other ETH projects out there.
Regardless, I believe the real value in Maker is that it justifies its own existence. First of all, it utilizes ETH in a unique way that provides the entire network with pegged coins. How many ERC-20 projects are completely self-contained and bring no direct value to ETH? Honestly, maker is the only project I've seen that isn't quarantined like this.
Secondly, Maker is used as the lender of last resort. In the event of catastrophic collapse Maker will be created to collateralize the bad debt due to Black Swan events. Combined with interest rates being paid only in Maker (and those coins being permanently destroyed) the MakerDAO is one of the few projects out there that seems to have very good checks and balances.
Imagine the future as ETH keeps gaining value. Say there is a friend in need who could use some quick cash. Could you imagine creating say $2000 out of thin air and transferring it them within minutes without any kind of permission required? That is the world we are headed toward, and it blows my mind.
I was also able to scrape together a few hundred dollars from my bank account. Incoming to Coinbase in one week.
Conclusion
The market is fully bottomed out right now, and I am making 'big' bets on that 'fact'. Come December I'll be forced to reevaluate my position. Until then...