Decentralized finance (DeFi) has revolutionized the financial landscape by empowering individuals to actively participate in the world of cryptocurrencies and blockchain-based lending and borrowing. One platform that stands out in this space is Spark Protocol, built on the MakerDAO ecosystem. Spark Protocol offers users the opportunity to earn passive income by utilizing their assets and participating in lending activities with the stablecoin DAI.
In this comprehensive guide, we will delve into the workings of Spark Protocol and explore how users can leverage this innovative platform to earn passive income. From understanding the fundamentals of Spark Protocol to becoming a supplier on the platform and earning from the “sp” tokens, we will cover the key steps and strategies you need to know. Additionally, we will explore the role of the Dai Savings Rate (DSR) module and how it can further enhance your passive earning potential.
Whether you are new to DeFi or an experienced participant, this guide will provide you with valuable insights and practical knowledge to start earning passively through Spark Protocol on the MakerDAO ecosystem. So, let’s dive in and uncover the exciting opportunities that await you in the world of Spark Protocol and MakerDAO.
What is Spark Protocol?
Spark Protocol is a decentralized finance (DeFi) lending platform built on the Ethereum blockchain. It was launched in May 2023 by MakerDAO, the decentralized autonomous organization that operates on the Ethereum blockchain and issues the DAI stablecoin. It was developed by the Phoenix Labs research and development team for the Maker ecosystem.
It aims to provide users with lending and borrowing capabilities for various cryptocurrencies, including Ether (ETH), staked Ether (stETH), DAI, and staked DAI (sDAI). The platform is designed to offer competitive interest rates and enhance liquidity options for users.
Spark Protocol is specifically focused on the DAI stablecoin and is closely integrated with MakerDAO’s ecosystem. It leverages Maker’s D3M (Direct Deposit Dai Module) to facilitate interaction between Maker and third-party lending pools, enabling users to borrow DAI at more competitive rates.
By utilizing the Spark Protocol, users can supply their assets and earn interest on their holdings. The platform utilizes Chainlink price feeds for most trading pairs, providing reliable and accurate market data.
The Spark Protocol lending solution aims to enhance MakerDAO’s DAI lending capabilities, increase liquidity, improve interest rates, and offer users a yield-bearing version of DAI. It plays a role in expanding DeFi opportunities and empowering individuals to engage in decentralized lending and borrowing activities.
How Spark Protocol works
Spark Protocol is modeled after the Aave V3 to serve as a “lending marketplace” where users can engage in lending and borrowing activities involving cryptocurrencies like Ether (ETH), staked Ether (stETH), DAI, and staked DAI (sDAI).
By linking the Spark Protocol with Maker’s D3M, users can borrow DAI at more competitive rates, starting with an annual rate of just 1.11%. The connection between Spark Protocol and Maker’s D3M also establishes a direct wholesale credit line in DAI, injecting fresh liquidity into Spark Lend and enabling users to access the best rates available in the market.
Ultimately, the Spark Protocol lending solution enhances MakerDAO’s DAI lending capabilities, boost liquidity, offer users improved rates, introduce a yield-bearing version of DAI, and expand liquidity options.
Spark has adopted Chainlink price feeds for trading pairs, excluding sDAI. This marks the first time that the Maker ecosystem has utilized Chainlink as its oracle provider.
Additionally, Spark has seamlessly integrated with Maker’s Peg Stability Module (PSM), enabling users to convert DAI or sDAI into USDC and vice versa. This integration offers users greater flexibility, allowing them to enter or exit the DSR (Dai Savings Rate) using Circle’s USDC stablecoin.
Rencently, MakerDAO has successfully passed several governance proposals. These include a proposal that reduces the dependency on Real World Assets as collateral and another that shuts down the credit vault accessible to SG-Forge, a subsidiary of Societe Generale.
MakerDAO has also proposed a new “constitution” to formalize and establish its governance processes. This move is aimed at safeguarding the protocol against potential threats from malicious actors seeking to take over. The new constitution utilizes “alignment engineering” to solidify the core commitments of the Maker community, ensuring the security, stability, and protection of user funds from failures or losses caused by human and institutional decisions.
Earning a passive income on Spark Protocol
As a lending protocol, Spark Protocol is beneficial to both lenders and borrowers. While borrowers can borrow DAI against a collateral, lenders, commonly referred to as suppliers on the platform, get the opportunity to deposit ETH and earn fees and DAI Savings Rate (DSR).
Becoming a supplier on Spark Protocol
To become a supplier (lender) on Spark Protocol, you start by visiting their official website, clicking on “Launch App”, and establishing a connection with your wallet.
Once connected, select your preferred asset, such as ETH, and click on its “Deposit” button. Then enter the desired amount you wish to deposit, carefully review the transaction overview information, and then click “Deposit” again.
Finalize the deposit transaction using your wallet and wait for the confirmation of the transaction.
Once the transaction is finalized, you will now receive an “sp” token, such as spWETH, representing your deposit. At this stage, you can engage in lending or even proceed to open a borrowing position on Spark Lend.
How to use the crypto assets supplied to Spark Protocol
The funds supplied to Spark Protocol are securely stored in a transparent and audited smart contract. The smart contract code is open source, publicly available, and has undergone formal verification and auditing by trusted third-party auditors ensuring the integrity and reliability of the system.
With Spark Protocol, users have full control over their funds. They can withdraw their funds from the pool whenever they need them, providing users with on-demand access to their assets.
Additionally, users have the option to export a tokenized version of their lender position called spTokens. These spTokens can be freely moved and traded like any other crypto asset on the Ethereum blockchain. This flexibility allows users to manage and trade their assets seamlessly within the Spark Protocol ecosystem.
Earning from the “sp” tokens
“Sp” Tokens holders benefit from continuous earnings that adapt to market conditions based on two main factors namely Interest Rate Payments on loans and Flash Loan fees.
In connection to the Interest Rate Payments on loans, suppliers receive a portion of the interest paid by borrowers, which is determined by the average borrow rate multiplied by the utilization rate. As the reserve’s utilization increases, suppliers can expect higher yields.
In connection to Flash Loan fees, suppliers are entitled to a share of the Flash Loan fees, specifically 0.09% of the Flash Loan volume.
In addition to the above factors, it is important to also note that each asset has its own supply and demand market accompanied by its unique Annual Percentage Yield (APY), which evolves over time. To assess the rate evolution, you can refer to the average annual rate observed over the past 30 days. For more comprehensive data on each asset’s reserve overview, you can navigate to the home section within the app.
Earning from the Dai Savings Rate module
Spark Protocol introduced a tokenized version of the DAI deposited in the Dai Savings Rate (DSR), called Savings DAI (sDAI). This allows Spark Lend’s users to employ a yield-bearing version of DAI that is automatically connected to the Dai Savings Rate module.
The DSR plays a vital role in the Maker Protocol system by providing users with the ability to deposit DAI and earn a steady interest rate.
The DSR interest is accrued in real-time and is derived from the system’s revenues. It represents the interest rate that users accumulate when they lock their DAI into MakerDAO’s DSR smart contracts.
Individuals who possess Dai have the freedom to lock and unlock their Dai into a DSR contract whenever they desire. Once locked in the DSR contract, Dai begins to accrue continuously, utilizing the DSR as a global system variable. Utilizing the DSR incurs no restrictions or fees, except for the gas fees required for the locking and unlocking transactions.
Spark Protocol, launched by MakerDAO, is a decentralized lending solution that provides users with opportunities to earn passive income using DAI. It operates as a lending marketplace, allowing users to engage in lending and borrowing activities with various cryptocurrencies. By integrating with MakerDAO’s ecosystem and leveraging the D3M module, Spark Protocol offers competitive interest rates and liquidity options for users.
The protocol utilizes Chainlink price feeds for most trading pairs, ensuring reliable market data. It also seamlessly integrates with Maker’s Peg Stability Module (PSM), allowing users to convert DAI or sDAI into USDC, providing flexibility in entering or exiting the Dai Savings Rate (DSR).
Spark Protocol contributes to MakerDAO’s goal of enhancing DAI lending capabilities, improving interest rates, and expanding liquidity options. It enables lenders to deposit assets and earn fees and DSR. The “sp” tokens represent these deposits, with earnings based on interest rate payments from borrowers and flash loan fees.
Additionally, Spark Protocol offers a yield-bearing version of DAI through the DSR module. Users can lock and unlock their DAI at any time, earning a steady interest rate derived from the system’s revenues.
By participating in Spark Protocol as a supplier or lender, users can tap into the potential of earning passive income while contributing to the growth and liquidity of the decentralized finance ecosystem.