Decentralized Assets and Liquidity Mining with dToken: Frequently Asked Questions
Decentralized Assets are live, and Liquidity Mining rewards for all dToken pools have started pouring in with hundreds of percent in annual returns for each of the pools, making it a very lucrative endeavour for all DeFiChain users. In this article, we will answer the most frequently asked questions (FAQs) about Decentralized Assets and Liquidity Mining with dToken.
- What are dTokens? Simply explained!
- When will the DUSD price be at 1 USD?
- What is the difference between buying dTokens on the Decentralized Exchange and minting them yourself with a Vault?
- Why are vaults halted?
- How does liquidation work?
- What is the liquidity mining block reward in DFI?
- What are the risks associated with Decentralized Assets?
- By how much should my Vault be over collateralized?
- What's the best strategy to make money with Decentralized Assets?
- If I mint a dToken (e.g. 1 dTSLA), how much do I then have to pay back?
What are dTokens? Simply explained!
dTokens allow you to get price exposure to Decentralized Assets, which are in fact cryptocurrencies and can be minted by anyone by using DeFiChain’s new loan scheme.
The price of these dTokens is determined by supply and demand and can be swapped on a decentralized exchange (DEX). What makes them interesting, however, is that the price may not necessarily be correlated to the rest of the crypto ecosystem, but rather to real world assets.
If, for example, you invest in dTSLA, then you are not investing into the real TSLA stock, but you are rather investing into a digital token that is likely to follow the price of TSLA among other variables. As such, dTSLA is a decentralized asset, created by anyone and backed by nothing else but cryptocurrencies such as DFI, BTC or stablecoins like USDT or USDC.
DeFiChain’s minting feature uses pricing oracle to determine the value of the dToken you want to create. For dTSLA, that value should be close to the real world price of an actual TSLA share. As soon as the dTSLA dToken is minted, the price finding process is only driven by supply and demand.
If you want to learn more about this new financial ecosystem, then you can find more information here.
When will the DUSD price be at 1 USD?
Just like with any dToken, the value of cryptocurrency needed to mind DUSD in the first place is determined by pricing oracles and not via supply and demand.
When you want to buy or sell DUSD, however, you can only do so for the actual market price on the Decentralized Exchange, which is determined by supply and demand.
That means there are actually two prices: one is the price when you mint a new dToken like DUSD, and the other is the price when you want to buy or sell it on the Decentralized Exchange (DEX).
As of writing, the DUSD price you are currently paying on the open market is considerably higher than 1 USD. The reason for this is higher demand for DUSD than new DUSD being minted and sold (supply) to balance out the price.
This will change as more people enter the DeFiChain ecosystem and start using this opportunity by minting DUSD and selling it at the current higher market price.
On top of that, the community has proposed further incentivizing features like the implementation of a funding rate. If you want to learn more about that and how it is likely to make sure the price does not diverge from 1 USD, click here.
What is the difference between buying dTokens on the Decentralized Exchange and minting them yourself with a Vault?
The dTokens that you can either buy on the Decentralized Exchange (DEX) or mint yourself by using a Vault are the exact same. When you are buying dTokens on the DEX, you are just buying the dTokens that somebody else minted.
There can be a big price discrepancy between buying dTokens and minting them. When you buy dTokens on the Decentralized Exchange, you are buying them based on the DEX price, which is determined by supply and demand.
Contrary to that, if you create a Vault and mint the dToken, the price is taken from a pricing oracle. This price should be close to the real world price of an asset.
This means that the DEX price can fluctuate and diverge from the oracle price. Most dTokens are currently more expensive on the DEX than the oracle price. The reason for this is a higher demand than supply in the form of newly minted dTokens – a viable arbitrage opportunity for people interested in minting new dTokens.
Another difference when minting dTokens is that – as explained in our previous blog post – dTokens can only be minted with a Vault that is at least 150% over-collateralized. As such, you are taking out a loan against your collateral to mint new dTokens.
Further down the line, when you want to transfer the collateral out of your Vault and close it, you will have to pay back this loan together with the accrued interest rate. If your collateral falls below your chosen minimum collateralization ratio (at least 150%), you risk being liquidated and losing your collateral.
On the other hand, if you just buy dTokens on the Decentralized Exchange, you can do so without creating a Vault or taking out a loan. All you have to do is to is choose the coin you want to swap and the dToken you want to receive. That’s all!
Summarizing, creating a vault to get a dToken provides you with much more flexibility, but you need more capital (to over-collaterize) than if you were to just buy the dToken directly on the DEX.
In the end, you need to think possible strategies through, compare the current rates and returns, and decide for yourself.
Why are vaults halted?
Vaults can be halted in case of disruptive events like major blockchain issues or if the oracle price jumps by 30% or more within a very short period of time. In that case, all Vaults are halted in order to prevent a mass liquidation event. This feature is thus implemented to protect the DeFiChain community and all its users.
How does liquidation work?
Vaults get liquidated when their collateralization ratio falls below the chosen minimum (at least 150%) collateralization ratio selected during the Vault set up process. If a Vault gets liquidated, it will be put up for auction and anyone can offer bids in the form of the dTokens that were minted by this Vault.
You can bid via the command line using the DeFiChain desktop wallet. The DeFiChain mobile app does not yet support it; a graphical integration is in the works and should soon be implemented in one of the next upgrades. However some mobile DeFiChain Wallets already offer a graphical user interface (GUI) to place auction bids.
And most importantly, if you are ever liquidated: No one is stopping you from bidding on your own liquidated Vault. So get the respective dTokens and bid on your collateral! In that special case, it makes sense to place bids very close to the actual collateral value or even buy your collateral at a loss, since otherwise you lose your whole collateral.
What is the liquidity mining block reward in DFI?
The liquidity mining reward for all 16 new dToken liquidity pools is 100 DFI per block, which decreases about every 11 days by roughly 1.6%, so you can calculate with an average of 76 DFI per block.
What are the risks associated with Decentralized Assets?
There are non-manageable risks, and manageable risks when you put your Decentralized Assets into Liquidity Mining.
Non-manageable risks are part of the game, like the price volatility of an asset (and with that impermanent loss as well) and potential coding errors. These errors are limited and are greatly reduced, though, with DeFiChain’s non-turing complete blockchain architecture.
Manageable risks are risks that are likely to be "corrected" over time, such as DUSD being valued at 1 USD on the DEX, or an unhealthy collateralization ratio, which can also be topped up if it gets too risky.
By how much should my Vault be over collateralized?
This is something you need to decide on your own. We can give you a recommendation, however:
The number one rule of investing is: never lose money. Especially in the long run, it pays off to be safe.
When taking out a loan (and thus minting dToken), you always need to be prepared for a sudden potential drop of 50%, sometimes even more. In addition, you also have to factor in potential risks due to volatile oracle prices.
So to be safe, your collateralization ratio should be at least 200, if not 300 percent over the minimum collateralization ratio you have chosen (liquidation ratio) when you set up your Vault. If you open a vault with a minimum collateralization ratio of 150%, that means you should over collateralize it with 450%, just to be on the safe side.
What's the best strategy to make money with Decentralized Assets?
There is no right or wrong answer to this question.
In the end, it's all about your personal preferences, risk and volatility tolerance, as well as investment goals you would like to achieve.
However, you can read about possible strategies and tactics in our recently published blog posts.
If I mint a dToken (e.g. 1 dTSLA), how much do I then have to pay back?
In order to close your Vault and withdraw your collateral, you have to first pay back your outstanding loan. This means that you have to pay back the amount of dTokens you once minted, plus the accrued interest rate, depending on the loan scheme you have chosen when you set up your Vault.