cDAI is a compound token. An algorithmic interest rate platform based on Ethereum, called Compound, exists. With Compound, developers can create a limitless number of decentralized financial apps while also allowing common users to earn interest by keeping their digital assets.
This article will provide a quick overview of how Compound works before diving into one of the Compound tokens, cDai.
So, what is Compound, and how does it work?
Compound is a platform designed to be a protocol for creating fixed-rate, reliable, and decentralized currencies. It allows dApps (decentralized apps) to create tokens backed by cryptographic assets on the blockchain. Regular users can join together in a large liquidity pool, allowing people who aren’t speculators to contribute assets for others to borrow from and then share in the interest payments.
Users choose which asset they want to borrow from the list of supported assets on the Compound Markets site. The mint function sends crypto assets to Compound, and the interest begins accumulating.
After the user “enters the market” for an asset, Assets supplied to the protocol can be pledged as collateral. Users may also participate in many markets at once. The Compound protocol allows users to earn interest on assets collateralized via it. While their tokens are in the collateral state, users cannot redeem them.
Developers can develop dApps on Compound, while non-technical users may use a wallet interface like Argent or Coinbase to interact with smart contracts. At the time of writing, Compound currently supports ERC-20 tokens only.
What are the cDai tokens, and how do they work?
DAI is an ERC-20 cryptocurrency that was designed specifically for use on the Ethereum network. It can be purchased in either a centralized or decentralized cryptocurrency exchange or by using a DEX. You may also borrow DAIs using the Maker Protocol by depositing Ethereum-based assets as collateral to underwrite the amount of DAI borrowed.
So, cDAI serves as proof of ownership for those who contribute DAI to Compound. Exchanging Dai for cDai is similar to establishing a traditional savings account (when savings accounts are used to pay a decent interest rate) for crypto holders who want to HODL their coins. After all, in the DeFi space, lending is one of the most popular methods to earn passively.
How to buy cDai tokens
You will need DAI coins to have access to cDai tokens. First, to purchase DAI, you need to purchase DAI via a crypto exchange supporting it, or by swapping Ethereum (or some other ERC20 token). If you don’t already have DAI, the Coinbase app (iOS or Android) is a good place to go. Once you’ve acquired some DAI or Ethereum (or another ERC20 token), head over to Compound and open an account.
Now, you need to deposit some Ethereum (or another ERC20 token) or DAI to Compound. Once you do, Compound will allow you to convert your crypto into the native cDAI token. You may also do this via Uniswap. You can also earn interest on your deposited funds by lending them out! At this point, your cDai is ready for use.
History of cDai (CDAI)
cDai (CDAI) launched on October 29th, 2018. It is a simple, effortless way to earn interest in your digital assets. While keeping track of the cDai value may be confusing at first, it’s very similar to how US savings bonds work. You can purchase cDai using either DAI or ETH. While you are earning interest on your cDai, you cannot access them. Once the duration has passed, they are returned to the same address that sent cDai to Compound.
Compound creates a loan for an individual by allowing them to use their digital asset as collateral in return for cDAI and then lend it out on the Compound platform. cDai is used to pay interest on these loans, while anyone can use cDAI for margin trading on their digital asset against BTC/ETH/USDT or MKR.
cDai is an effective and efficient way of borrowing Ethereum-based assets for users of the Maker Protocol. With cDai, anyone can obtain interest on their DAI or ETH while keeping them locked up. cDAI is a native token that represents ownership within Compound. It’s important to note that holders of cDAIs must also have DAI or ETH in their own account to earn interest.
What can I do with my cDai?
cDai is issued to anyone who sends DAI or ETH to Compound. As mentioned above, cDAI allows holders to earn interest on their locked-up assets. If you have no tokens in your account to borrow, you will not receive any interest.
Do I need to Pay Tax on cDAI (CDAI)?
Yes, cDAI (CDAI) is taxable. If you are planning to invest in cryptocurrencies like cDAI, rest assure that trading with these coins will be taxable, either as income or as capital.
Do I need to pay interest on my cDAI (cDai)?
No, you can keep your cDAI as they are and earn interest without ever accessing the funds. However, if you wish to withdraw your DAI at any point of time, then Compound will deduct the accrued interest until the stability period ends.
Is DAI coin a stable coin?
Yes, since DAI is a stablecoin, it is pegged to USD. It uses a system of collateral and decentralized governance to maintain a one-to-one reserve ratio. This means that the value of 1 DAI is always equal to $1.
How many cDai can I own?
There is no limit on how many cDai you can acquire.
Is cDAI (CDAI) an ERC20 token?
Yes, cDai is a fully-fledged ERC20 token. Users can always store and transact with their tokens using any compatible Ethereum wallet.
Can I receive cDai as payment for goods or services?
cDai is held as collateral by Compound, an Ethereum-based financial service that provides secure P2P loans to users based on the value of their digital assets. cDAI can be used to access this service and lend your own DAI or ETH for interest.