Why would one borrow Dai instead of buying from exchange ? if i have $150 worth ether i can borrow $100 worth Dai. With 8% stability fee basically at 8% interest rate. On the other hand i can just exchange ether for Dai and get $150 worth Dai without any interest. what is the logic here
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youtu.be/9w7h50OB-Mc This video explains it all. The price of dai is not stable. We are making it stable.– Amiya BeheraCommented Feb 12, 2020 at 9:40
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When you buy dai, it's not $100 worth. It's much cheaper. You are buying 100 dai, not $100 worth dai.– Amiya BeheraCommented Feb 12, 2020 at 9:54
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if i am not wrong if you want to create 1 dai you have to deposit 1.5 $ worth of ether and when you buy a dai from exchange its 1dai =1$– Shilpan ShuklaCommented Feb 15, 2020 at 6:30
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2 Answers
Lets say, you own 1 ETH, which currently has a price of 300$. When you sell this, you can buy DAI worth 300$ on the makret (around 300 DAI). And when you sell the DAI, you will get back around 300$, as expected from a stable coin.
But when you deposit you 1 ETH, to get 200 DAI, you effectively keep your ETH, you just can't use it right now. When the price of ether increases (lets say 10% in 1 year) more than the interest rate (8%), you can get back the 1 ETH, for 216 DAI. So you have to buy 16 additional DAI for 16$. But now you have 1ETH, which is worth 330$. So you have 330$-16$=314$, when you sell it, instead of just 300$. This also works, when you deposit new ETH to get the 16 DAI, instead of buying it on a markt for $.
There may be more reasons, that work when you expect the price of ETH to go down as well, but this the only reason I know right now.
This reddit post is helpful in understanding why borrowing DAI makes sense.
In summary (link to the comment):
There could be different reasons:
- Bob has to make a purchase, but he thinks Eth value will go up and does not want miss out.
- maybe in its jurisdiction this is not a taxable event, so it’s a way to spend crypto without paying capital gain taxes
- Bob sees an arbitrage opportunity on an exchange where Dai trades above 1 USD.
- Bob is building a leveraged long position, using the Dai to buy more Eth.
On the other hand, if you're sitting on fiat and you need a stable coin for payments, you can simply exchange fiat for DAI without having to interact with MakerDAO collaterized debt positions (CDPs).
