[v64]

Those with loans in the system will have to pay a 6% interest rate. Since not all holders of Dai have savings accounts, this allows for the system to use the interest charged to loan holders to pay out the savings rate while accumulating a surplus.

A 6% interest rate on USD would be a red flag, but Dai isn't USD. As far as I know, no banks allow you to use Ether as collateral for a USD loan, so the comparison isn't apples to apples.

[hnews_account_1]

> A 6% interest rate on USD would be a red flag, but Dai isn't USD.

Is this written in their documentation? Cos this is where the smart money gets out. The DAI competes against the USD. So all their transactions have to be in USD. No vendor for your products is accepting these magical tokens. No one in the economy except vanishingly small fractions accept digital tokens for trade.

Also, this is how the economy functions. All they've done is create a bank and sprinkled the fairy dust of "tokens" on it so the Fed stays away.

[v64]

> No vendor for your products is accepting these magical tokens. No one in the economy except vanishingly small fractions accept digital tokens for trade.

MakerDAO has a list of vendors who accept Dai today [1]. The list also contains a number of payment processors that enable businesses to accept Dai. It's true that it's not widely used now, but every product has to start somewhere. I don't think I'm going to be getting paychecks in Dai within my lifetime, but that's no reason to discourage its growth.

> All they've done is create a bank and sprinkled the fairy dust of "tokens" on it so the Fed stays away.

You say that as if creating an automated decentralized bank that generates an asset pegged to the US dollar is something that just anybody could do. Regardless of how Dai is ultimately used, creating the system and deploying it to the public is a successful proof of concept in itself.

[1] https://github.com/makerdao/awesome-makerdao#spend-dai

[hnews_account_1]

> It's true that it's not widely used now, but every product has to start somewhere.

Fair enough. If it grows, it grows.

> You say that as if creating an automated decentralized bank that generates an asset pegged to the US dollar is something that just anybody could do.

If you have 100% collateralised loan, yes, anybody could do it in this day and age. Money can actually grow in an automated fashion without a central authority if we accept the inevitability of economic crashes and depressions.

Here's my thought experiment - say DAI suddenly overnight replaces the dollar. I don't know enough about the system, but I know finance very well. Next, say the day after the economy starts crashing. Manufacturers cannot see any orders coming in, consumers don't want to spend money etc etc. Run of the mill crash. What would DAI do?

I'll tell you how this works out in an uncontrolled money system - the crash goes on for more than a couple of years. People lose jobs, companies close etc. The federal reserve's one and only job (the regulation part is hogwash, they can't regulate for shit) is to cushion such an economic crash. What happens without it? Will the benevolent DAI system controllers step in?

[lokedhs]

The products being sold by vendors that accept these tokens still price their products in real currencies, and I'm assuming they immediately exchange it as soon as the transaction completes.

With that in mind, accepting cryptocurrencies is just a technicality and doesn't reflect any acceptance of it as a real currency.

Are there any vendors who actually price their products in a cryptocurrency?

[thebean11]

> With that in mind, accepting cryptocurrencies is just a technicality and doesn't reflect any acceptance of it as a real currency.

As a currency sure, but it reflects acceptance as a means of exchange. There are actually big segments of the crypto community who find the latter much more important

[hendzen]

Why would someone agree to take out a loan with a 6% interest rate when the fed funds rate (not incl spread for various retail products etc) is 400+ bps lower. Even with the spread you are going to be paying less than that for a regular margin loan for trading, which is what I assume these loans are used for.

[hnews_account_1]

Most people? Personal loan rates are closer to 7-8% on average I think. The fed funds rate is the very basic rate of economic activity. I mean, you obviously included the caveat about the spreads for retail products. What did you think those spreads looked like?

[hendzen]

The effective cost of borrowing is going to be considerably higher than 6% if a regular person is trying to pay for their living expenses with the principal of a loan denominated in cryptocurrency. Think about exchange fees, taxes for any appreciation/depreciation upon sale, the cost of tracking/filing the taxes etc.

As I said it seems like most of the DAI borrowing is being done by people taking out margin loans to speculate on crypto. Perhaps this might make sense for the limited use case of people trading cryptocurrency (which is its most popular yet pointless application), but I don't see it being useful or economically viable for general purpose loans.

EDIT: upon further thought since the loan has to be secured with crypto assets, its not comparable to a personal loan. The equivalent regular finance product would be for a portfolio line of credit. Those have much lower interest rates, fed funds + 1-3% depending on the source.

[hnews_account_1]

> The effective cost of borrowing is going to be considerably higher than 6% if a regular person is trying to pay for their living expenses with the principal of a loan denominated in cryptocurrency. Think about exchange fees, taxes for any appreciation/depreciation upon sale, the cost of tracking/filing the taxes etc.

I agree with that entire paragraph, so the rest of your comment is moot in terms of debate. However, I was just saying that on its face, 6% inside the USA is a good rate for loans.

[thedufer]

Personal loan rates aren't collateralized, which you're comparing with fully-collateralized loans. That's apples and oranges. Loans that are actually similar run <4%, not 7-8%.

[hnews_account_1]

Fair point.

[TylerE]

Who eats the cost when one of these borrowers defaults?

[v64]

If a borrower defaults, their account is flagged and their Ether collateral is eligible to be auctioned off to pay off their debt. The mechanism is designed so that a loan is closed at a point where auctioning the collateral will cover the debt.

In the event that the value of their collateral doesn't cover the debt, the Maker system has a surplus account that would cover the difference. In the event that the surplus can't cover the remainder of the debt, MKR token is created and auctioned off to to cover it.

Since this devalues MKR, holders of MKR token are incentivized to ensure that the system always runs at a sufficient surplus to cover these events and that loans are liquidated early enough to prevent having to dip into the surplus.

In addition to this, interest on loans are paid in MKR token and destroyed when the loan is closed, which also incentivizes holding MKR.

[vinniejames]

A default is not possible. The loans are fully secured by Ethereum. If collateral dips below an acceptable threshold, the collateral is liquidated and the debt is payed back to the system in full

[TylerE]

What’s the point of the loan then? Why not just use the collateral at 0%?

[v64]

I said this in another comment below:

> If you sell the Ether, you no longer have the Ether. If while you're holding the loan the price of Ether goes up, you benefit from that. Of course, if the price of Ether goes down, you're at risk of having your loan liquidated, but that's a requirement imposed by the system to maintain the Dai peg.

[fourtens]

maybe they want to leverage? take out a loan secured in eth, and use that loan to buy more eth