Interest rates offered by banks today are abysmal.
In 2019, the average interest rate on a UK savings account was just 1.39%, while in the US it was a tiny 0.09%. That’s shockingly bad.
Especially when you consider that inflation rates for the UK and US in 2019 were 1.89% and 2.3% respectively. That means holding money in accounts that are supposed to help you save money is actually causing you to lose spending power to inflation.
But what alternatives are there?
The typical approach is to simply invest in the stock market. But if you don’t want to take on additional risk, this may not be for you.
Enter Decentralized Finance!
Built largely on the Ethereum blockchain, a platform that enables the development of applications—or smart contracts—on top of it, decentralized finance (DeFi) seeks to provide a globally accessible, fair alternative to today’s financial services.
If you want to read more about the basics of DeFi, I highly recommend having a read of A Beginner’s Guide to Decentralized Finance by Coinbase’s Sid Coelho-Prabhu.
The DAI Savings Rate
DAI is a ‘stablecoin’ that is built on Ethereum. Where cryptocurrencies are typically notorious for their volatility and high risk, DAI is always valued at $1. It’s stable.
It is backed by collateral that comes in the form of ETH (Ethereum’s native currency), and other Ethereum-based coins and tokens.
Due to its stable price, DAI itself is an Ethereum token that serves as the backbone for many DeFi applications.
To get started with the DAI savings rate you’ll need an Ethereum wallet, a little ETH, and some DAI. I’ve written a handy guide to getting started with DeFi here.
The most basic application of DAI is the DAI Savings Rate. It’s essentially a low-risk savings account that, at the time of writing, pays a staggering 8.75% interest per year on any DAI that you deposit.
1. To get started, simply go to the DAI Savings application, called ‘Oasis Save’.
2. Connect with MetaMask.
This is the Ethereum wallet extension that you’ll use to interact with most applications built on the Ethereum platform. If you haven’t got a MetaMask account yet, get one here or read my guide to getting started.
3. Hit ‘Deploy Proxy’ and confirm the MetaMask transaction when it pops up.
4. Wait for the transaction—labelled ‘Build’ in MetaMask—to switch from Pending to Confirmed.
Do the same for ‘Set Allowance’ and then continue. This may take a while depending on how busy the Ethereum network is, but it’ll typically take a few minutes at most.
5. Deposit some DAI, again confirming the MetaMask prompt as it appears.
And you’re all set! You can watch your DAI accrue interest in real time in the application, and can withdraw at any time you want.
CHAI
Chai is an extension to the DAI Savings Rate. It is another token built on Ethereum that has a special property: every CHAI token represents DAI that has been deposited into the Oasis Save application.
This may be preferable to keeping DAI deposited in an application, as your CHAI can be kept in your wallet and even sent to other addresses.
To get started with Chai you’ll need an Ethereum wallet, a little ETH, and some DAI. I’ve written a handy guide to getting started with DeFi here.
1. Go to the Chai application, enter a DAI amount in the box, hit Convert and confirm the MetaMask prompt.
And that’s it! Your DAI balance will increase in the application based on the DAI Savings Rate, and your CHAI remains in your Ethereum wallet. You can convert your CHAI back into DAI at any time by clicking on the CHAI→DAI tab and repeating the process.
The Risks
While any associated risks with these applications are low, I feel I need to at least mention them.
- Smart contract hacks. Risks are lower in the Oasis Save application due a very rigorous testing process and constant audits. Slightly higher risk in Chai due to it being a newer contract, but it’s relatively simple by comparison so any bugs are extremely unlikely. All in all, a very low risk, but something to be aware of.
- Dollar fluctuations. If your local currency is not the dollar, there’s also a small risk that the dollar will lose value against it and your holdings will drop. That said, there’s also a chance the dollar will gain value against your local currency and your holdings will increase! A small risk, considering the potential rewards.
You’re all set—enjoy earning that sweet 8.75% interest!
I should mention the DAI Savings Rate is subject to change based on demand. When I made my Getting Started guide a couple weeks ago, it was only 6%, and has increased twice since then.
There’s a lot more you can do with decentralized finance applications on Ethereum, and I’ll be creating more posts exploring these things in the near future.
In the meantime, if you’re interested in exploring other DeFi apps, the Beginner’s Guide to Decentralized Finance article I linked earlier in this post is a great place to start.
For now, enjoy finally being able to beat inflation with a savings account!
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