Cheers to Chai, the Newest Interest-Bearing Token

Hello defiers! Hope you’re doing great. Before getting into DeFi, I have great news to share: My book on Ethereum is available for pre-order! The Infinite Machine is the non-technical story of how Ethereum got created; the 19-year-old prodigy who inspired a rag-tag bunch to drop everything and join him in building the rails of a more decentralized future. Read more details and pre-order here, on hardcover, digital or audio :)

Now, here’s what’s going on in decentralized finance,

• First there was Dai, and now there’s Chai
• Does decentralized finance cannibalize proof-of-stake?
• Report shows DeFi derivatives and new addresses exploded in Q3

Chai Lets You Earn Interest on Your Dai

I read somewhere that DeFi sounds more and more like magical potions than finance and I loled. It’s certainly true in the case of Chai, a wrapper which allows Dai holders to easily start earning interest on their stablecoin.

To understand how this works, first take a step back to remember that Dai is MakerDAO’s dollar-pegged stablecoin. In MakerDAO’s recently upgraded system, holders of Dai can earn interest –the so-called Dai Savings Rate– by locking up their Dai in a MakerDAO smart contract. Users can withdraw their Dai plus interest at any time. Now, Chai is a wrapper which allows traders to earn interest by exchanging Dai for Chai, without having to lock up their tokens.

This potentially allows Chai tokens to be further used in other platforms –if this happens then you could have a situation where you could lend out and earn interest on a token that’s already earning interest (which sounds a bit too close to the financial engineering schemes of past crises). It also allows users to hold tokens directly in their wallet, rather than in MakerDAO or other applications’ smart contracts.

Dai holders also have the option of lending their stablecoin on Compound Finance, DDEX or others apps, and earn interest that way. The difference with locking Dai in Maker and exchanging it for Chai, is that there’s lending risk –borrowers could default, platforms could become insolvent, or some other black swan event. Even with these risks, interest in these platforms is lower than the 2% DSR on Maker and Chai.

This innovation is an example of how this new financial system allows developers to take pieces of other team’s platforms and build around them, to create new and hopefully improved products.

One question here is whether these types of wrappers, which incentivize earning interest outside of the MakerDAO platform, debilitate the system. If the idea behind DSR is to create an incentive for people to hold Dai, then it shouldn’t make much difference if it’s in a Maker smart contract or somewhere else.

Does DeFi Cannibalize PoS?

Report Shows DeFi Explosion in the Third Quarter

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About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.