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MakerDAO Vaults

What are they, how do they work, and should you open one up.
NJ
Written by Nodar Janashia
Updated 3 months ago

What is a Vault?

A Vault is a smart contract that locks up collateral in order to generate DAI - a stablecoin. The ratio of locked-up collateral value to the amount of DAI borrowed must always be above a pre-defined Liquidation Ratio. Otherwise locked up ETH gets sold on market (liquidated) to pay back:

·       Your generated DAI amount

·       Accrued stability fees (continuously accruing fee based on your outstanding debt)

·       Liquidation penalty (currently 13%)

Vaults are categorized by the type of collateral used to generated Dai. Users create Dai by generating it against their collateral and destroy Dai when repaying their generated Dai balance.

The DAI you generate is effectively a loan backed by the collateral value of your deposits. In order to get back your ETH, you need to pay back the DAI at some point in the future.

Generated DAI could be used anywhere it is accepted, similar to USD. It can even be traded for USD or other tokens on exchanges.

Think of MakerDAO as an open-source Federal Reserve built on top of Ethereum. MakerDAO (MKR) token holders govern the system by voting on development changes which determine things like collateral requirements, stabilities, and liquidation penalties.

All credit data such as how many loans were originated, how much ETH is locked up and DAI generated, is always available for anyone to view and verify anytime on-chain.

Should you open a Vault?

The primary benefit of opening up a Vault at this time is getting instant liquidity without loosing your exposure to crypto assets such as ETH or BTC. But you have to be willing to accept liquidation risks and also believe that returns from staying exposed to crypto assets + returns generated from investing borrowed liquidity will outpace your borrowing costs.

Opening a new Vault via Oasis: UI portal by MakerDAO.

1. Visit https://oasis.app/borrow and connect you preferred wallet where you will be depositing collateral from. In this tutorial we'll connect with MetaMask:

2. Once connected you will see a table of collateral types you are able to deposit as collateral:

 3. If this is your first time creating a vault with your connected wallet, you will need to deploy your Vault contract (this will require an onchain transaction) AND allow Oasis to use your ETH (onchain transaction).

4. After setting up your vault, you will be able to select how much collateral you would like to deposit and how much DAI to generate. The more DAI you generate, the higher your liquidation price. For example, depositing ~$1,000 worth of ETH as collateral @ ETH Current Price of ~$455 to generate 333 DAI (or ~1/3 of collateral's worth) will put your liquidation price at ~$227 (or ~1/2 of current ETH price)

5. Confirm your Vault details & initiate an on-chain transaction which will deposit your collateral AND generate DAI in one transaction. Here's what you should see on Etherscan:

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