How I bought this car with cryptocurrency & still have my crypto!
A real life example of how Decentralized Finance (DeFi) works
DeFi is all the rage in blockchain these days; but really what is it? Simply put it is a more advanced form of a cryptocurrency transactions. And actually it is quite cool as you will read here.
FYI: This article is written to explain the DeFi concept using MakerDAO — not as a technical guide on the Oasis App interface.
The DeFi space has exploded lately with tons of projects, just Google it. The one we will be talking about today is MakerDao and how I turned my Ethereum into U$D to pay for the car but still have 100% of my Ethereum.
List of things needed to complete the transaction:
1. Ethereum Cryptocurrency
2. Metamask Wallet
3. Oasis App Smart Contract Interface
4. Coinbase (or any Crypto Exchange that will allow you to sell DAI for Fiat)
5. Bank Account
6. Something to Buy — like more crypto or you can even put the DAI into an interest earning account for more return than just sitting on your crypto. It is like turning every crypto asset into a dividend paying stock.
Story-line: My 2017 Passat was coming off lease this September (2020). The car is like new with low mileage so I decided to buy it. The buyout was $12,100. Therefore I started saving in January. Each month I would put away $1350 to have enough when the lease was due. But rather than just bank it I decided to buy Ethereum as it was at a relative historical low:
My plan was to cash out my Ethereum in September to pay for the car. Here is the actual savings schedule:
So on September 15, 2020, over the course of 9 months, my $12,150 turned into $20,939 worth of Ethereum at the strike price of $364. Not bad. I had saved a total of 57.44 ETH (that is the currency symbol for Ethereum).
Paying for the car was not going to be an issue. However, if I were to sell my Ethereum I would be subject to at 35% short term capital gains tax of $3076:
Then it all changed when I listened to the Bad Crypto Podcast (BCP) Episode 442 on MakerDAO when I was out for a walk — this just saved me $3076 — read on. BTW the BCP Series is great, I highly recommend it.
MakerDao concept is really simple: you collateralize your Ethereum in a Smart Contract using the Oasis App interface Borrow function. This allows you to turn your Ethereum into U$D in a few steps; YET you keep ALL YOUR ETHEREUM.
Here are the steps (I will use round numbers to make it easy to understand from this point forward):
- Deposit your Ethereum into SmartContract via the Oasis App. This cost me $17 in Ethereum “GAS” (think transaction fee). Which at the moment is extraordinarily high; under normal market conditions the cost should be $5 or so.
- Once the Ethereum is in the SmartContract you can “borrow against it”. It allows you to literally “print cash” at 150% collateralization rate. So if you needed $10,000 in cash you would deposit $15,000 of Ethereum. With Oasis you “print” DAI tokens which are a “Stablecoins” that trade about 1:1 to the USD. This process also cost $17 in GAS fees.
- After you print your DAI coins you transfer them to an Exchange to swap for USD. In this case I used Coinbase.
- Then withdrew the U$D to my bank to pay for the car.
What is extraordinary about this there is no one involved and the entire process only took about 10 minutes. It is just you and a SmartContract. There is no approval process, there is no interest rate (called “Stable Fee” in Oasis-Speak). You can keep the “contract” open as long as you want. When you want to access your Ethereum, just deposit the DAI tokens back and you are done. The entire cost was about $40 in transactions fees, that again, would be much less if it was not for the current explosion of DeFi activity (which should stabilize soon bring transaction prices back down to earth).
Since you don’t sell the Ethereum there is no capital gain; saving the $3076 and keeping the ETH for further long term profit— talk about a win-win!
There is ONE RISK: breaking the collateralization ratio. In the example above if the price of Ethereum drops below $15,000 it will be immediately sold (automatically via SmartContract function) and DAI generated to pay back your loan. Therefore never borrow anywhere near the 150% rate as Ethereum (like all cryptocurrency) is just too volatile. In my spreadsheet graphic above you can see my Ethereum trigger price of $317 (highlighted in yellow). On September 23, 2020 ETH dipped to $318 — I was getting close. In preparation I deposited 1000 DAI into the contract for some elbow room.
Now in this example I need to buy a car. But most, if not all, use of this technology is used to generate income. Many many DeFI projects pay a return; like in the old days when a bank paid interest. Remember that?
And now to compound DeFi there are even projects that “Yield Farm” where the SmartContract “hunts” for the highest interest rate — by the minute. Tread these waters carefully. But this is the future of finance. Traditional banks are dead.
As you can see this DeFi example has some very very practical use and no doubt the technology will only provide faster, cheaper, and more unique solutions.
