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What is Compound Dai (cDAI)?
If you’ve spent some time on decentralized Finance or other cryptocurrency interest-earning platform, then you’ve probably seen something named cDai. It isn’t quite Dai; it has similarities with Dai.
Well, we will cover all you should know about cDai in this article, and also the reason it is becoming popular these days. We’ll also talk about every other several cryptos that make use of the c- prefix.
The concept of cDai is very simple. It is the token that Compound Finance issues when users deposit Dai on the lending website. The cDai to Dai ratio is roughly 50 cDai to each of the platform’s Dai, and that’s great to keep the cDai price at a steadily relative $0.02.
Nevertheless, cDai doesn’t function as a stable coin. It is instead supposed to have an increased value while Compound accepts more Dai. For example, right now one Dai will purchase 50 cDai, but as time passes one Dai will only be able to purchase 40 cDai.
That 50 cDai bought using 1 Dai will still be available, but it will have an increased value.
The reason cDai is very convenient is that it is an ERC-20 token. With this, rather than the token remaining locked away in Compound Finance, they’re allowed to move freely about any place possible for an ERC-20 token.
This denotes that the cDai token is able to move anywhere on Ethereum, and that takes us to the next reason cDai is so excellent.
Uses of cDai
The major use of cDai is now placing it into the Uniswap liquidity pool. This enables users to get some interest right from the liquidity pool alongside getting some appreciation on the cDai value because of cDai’s nature.
It is an excellent system. In addition, it is also one of the most secure ways of earning some interest without the need to worry about the loss in cryptocurrency value. An interest of 15% isn’t very much if the cryptocurrency value drops by up to 50%.
What’s Compound Finance?
It wouldn’t be nice to talk about cDai without talking about what’s responsible for it, which is Compound Finance.
Compound Finance is basically a decentralized crypto lending platform. Users can lend out cryptocurrency or decide to borrow cryptocurrency from this platform.
To borrow here, you just need to deposit crypto as collateral then take out a loan. Definitely, there’s a capitalization requirement determined by the crypto. For example, if the capitalization requirement of Dai is 70%, this denotes that you’ll be able to take out a loan (of another crypto), which is 70% of the Dai value that you deposited.
What we feel is the greatest draw to Compound Finance is that providing liquidity will allow users to earn interest on this protocol.
That’s where the c-tokens stated earlier come into the picture. Below is an example of the way it functions.
Sam deposits 200 Dai on Compound Finance so he can earn interest. Sam gets 10,000 cDai (1 Dai is equal to 50 cDai).
Some months later, there’s an increase in the cDai value, and 1 Dai can only buy 40 cDai. Sam then decides that he will exchange his 10,000 cDai for 250 Dai.
That is basically the concept of Compound Finance. The concept isn’t difficult to understand, and that’s an excellent way of earning interest on your cryptocurrency or to get a loan making use of your cryptocurrency as collateral.
That is basically all about cDai. It is primarily tokenization of the value of deposit on Compound Finance. Understanding the concept isn’t necessarily difficult, but it is one of the major differences between traditional Finance and decentralized Finance.