What is cDAI?

If you have spent any amount of time on DeFi or other interest earning platform for crypto, then you have likely seen something called cDai. It’s not quite Dai, but it’s pretty similar to Dai. 

Anyway, this article will cover everything that you need to know about cDai and why it’s become such a big deal recently. We will also cover all the other various cryptocurrencies that use c- as a prefix.

cDAI Explained

cDai is actually a very simple concept. It’s the token issued by Compound Finance when a user deposits Dai onto the lending platform. The ratio of cDAI to Dai is approximately 50 cDAI to every Dai on the platform, which does a good job at keeping the price of cDAI at a relatively steady $.02.

This is convenient. However, the function of cDai is not to be a stablecoin. Instead, cDai is supposed to increase in value as Compound collects more Dai. For instance, at the moment 1 Dai will buy 50 cDai, but over time 1 Dai will only be able to buy 40 cDai. 

The 50 cDai purchased with 1 Dai will still exist, so the value of it will increase.

What makes cDai so much more convenient is that it’s an ERC-20 token. This means that instead of the tokens existing locked away on Compound Finance they are free to move about anywhere an ERC-20 token can go. 

This means that cDai token can go anywhere on Ethereum, which brings us to our next point about what makes cDai so great.

The Use for cDai

The main use for cDai has turned into placing it into a liquidity pool on Uniswap. This allows the user to collect interest from the liquidity pool in addition to gaining some appreciation on the value of cDai due to the nature of cDai. 

It’s a great system, really. Additionally, it’s also one of the safer ways to earn some interest without worrying about losing value on the cryptocurrency itself. 

15% interest is not so nice if the value of the cryptocurrency drops by 50%.

What is Compound Finance?

It would not be right to discuss cDai without discussing the protocol that creates cDai – Compound Finance. 

First, Compound Finance is a decentralized cryptocurrency lending platform. A user can borrow cryptocurrency or they can deposit cryptocurrency on the platform to lend out. 

Borrowing is as easy as depositing a cryptocurrency as collateral and taking out a loan. Of course, there is a capitalization requirement based on the cryptocurrency. For instance, if Dai has a capitalization requirement of 70%, then this means that you can take a loan (in another cryptocurrency) of 70% of the value of the Dai you deposited.

Now, the bigger draw to Compound Finance, in our opinion, is that users can earn interest on the protocol by providing liquidity.

This is where the c-tokens mentioned earlier enter the picture. Here’s an example of how it works.

Bob deposits 100 Dai onto Compound Finance to earn interest. Bob receives 5,000 cDai (1 Dai = 50 cDai) in exchange. 

A few months later the value of cDai has increased and 1 Dai only buys 40 cDai. Bob then decides to exchange his 5,000 cDai for 125 Dai. 

That’s the basic concept of Compound Finance. It’s not really a difficult concept to understand, and it’s a great way to earn some interest on your crypto or to take out a loan by using your crypto as collateral.

Final Thoughts

That about sums it up for what cDai is – it’s simply a tokenization of a deposit’s value on Compound Finance. It’s not a particularly difficult concept to understand, but it’s one of the main differences between decentralized finance (DeFi) and traditional finance. 

Additionally, as has been shown with cDai holders earning interest by providing liquidity on Uniswap, the token gives holders much more flexibility than a traditional bank.