|#||Name||Price||Changes 24h||Market CAP||Volume||Supply|
What is Dai? (DAI)
The first decentralized, collateral-backed cryptocurrency, DAI is a crypto asset that attempts to maintain a stable 1:1 value with the U.S. dollar by locking other crypto assets in contracts.
This means that unlike other asset-backed cryptocurrencies, which may be issued by for-profit companies, DAI is the product of an open-source software called the Maker Protocol, a decentralized application running on top of the Ethereum blockchain.
As such, DAI maintains its value not by being backed by U.S. dollars custodied by a company, but by using collateralized debt denominated in ether (ETH), Ethereum’s cryptocurrency.
If you’re unfamiliar, collateralized loans provide a way for a lender to secure a loan using assets they own. Historically, these loans have a lower interest rate than unsecured loans, as they allow lenders to seize the asset and sell it in the event borrowers are unable to pay the loans.
The Maker Protocol, through smart contracts running on Ethereum, enables borrowers to lock ETH and other crypto assets, thus collateralizing it, in order to generate new DAI tokens in the form of loans.
If borrowers wish to recover the locked ETH, they will have to return the DAI to the protocol and pay a fee. In the event of liquidation, the Maker Protocol will take the collateral and sell it using an internal market-based auction mechanism.
Due to its design, the supply of DAI cannot be altered by any party in the network. Rather, it is maintained through a system of smart contracts designed to dynamically respond to changes in the market price of the assets in its contracts.
The Birth Of DAI: Creation And Issuance
MakerDAO was first introduced in 2015 by CEO and founder Rune Christensen, and the Maker Protocol — the architecture underlying the DAI stablecoin — was launched in December 2017.
MakerDAO’s model for DAI differs from other leading stablecoins. First, DAI features an unprecedented degree of decentralization. While stablecoins like tether (USDT) offer a cryptocurrency backed by a reserve of fiat assets managed by a central organization, no one entity controls the issuance of DAI. Instead, users looking to hold DAI submit Ethereum-based assets into a smart contract that uses them as collateral in maintaining DAI’s peg to the U.S. dollar.
Second, unlike most stablecoins, which are collateralized against a single fiat currency or cryptocurrency, DAI can use different cryptocurrencies as collateral: ether (ETH), basic attention token (BAT), USD Coin (USDC), wrapped bitcoin (wBTC), compound (COMP), and many more. At its inception, the Maker Protocol supported only ether as collateral. However, in November of 2019, the technology was updated to include BAT and USDC, creating today’s multi-collateral DAI system. The increased number of collateralizable currencies diminishes user risk and increases DAI’s price stability. New collateral options continue to be added through voting by the MakerDAO community.
Third, DAI token holders earn interest on their DAI. Those who hold MKR, MakerDao’s native governance token, set the DAI Savings Rate (DSR) and act as guarantors for DAI — meaning, their MKR tokens can be liquidated if the system were to crash. This structure incentivizes guarantors to ensure the proper functioning of the DAI system and its collateralized tokens.
How DAI Tokens Work
DAI is an ERC-20 token that can be purchased from both centralized exchanges and decentralized exchanges (DEXs). Additionally, you can generate and borrow DAI by opening a Maker collateral vault through MakerDAO’s Oasis Borrow dashboard and deposit Ethereum-based assets as collateral. Maker collateral vaults — previously referred to as collateralized debt positions (CDPs) in an earlier iteration of the Maker protocol — are smart contracts that hold collateral in escrow until the borrowed DAI has been returned. The value of the collateral you deposit must always exceed the value of the DAI you are issued. If the value of the collateral falls below the value of the issued DAI tokens, your collateral will be liquidated. DAI is one of the most integrated digital assets in the blockchain ecosystem and, once borrowed, can be used in decentralized finance (DeFi) applications or in blockchain-based games, among other places.
How Does DAI Maintain Its Value?
Dai uses game theory and carefully balances economic incentives to continuously sustain the value of $1. When single Dai falls below $1, the system incentivizes users to increase the price. When one Dai is worth more than $1, the incentives work the other way around. In any of these occasions, rational actors can make money due to the price swings. The further Dai deviates from the mean, the better incentives there are to fetch the price back to $1.
In addition to that, Dai coins are always over-collateralized. It means that instead of backing coins 1:1 with their underlying assets (Ether in this case), the ratio is always more than 1:1. For example, if Ether is worth $100 and the collateralization ratio is 150%, you can create 66 Dai.
In more technical terms, it all boils down to margin trading using ETH collateralized debt positions (CDP).
How To Generate Dai?
Dai is the second-largest decentralized stablecoin by market capitalization, having been flipped recently by Terra’s native stablecoin — UST. Both are backed by cryptocurrencies and pegged to the Dollar, while the top stablecoins like USDT, USDC and BUSD are backed by traditional assets such as cash, corporate bonds, U.S. treasuries and commercial papers (which has come under increased scrutiny in the case of USDT). So what exactly is Dai backed by? The Dai stablecoin is a collateral-based cryptocurrency soft-pegged to the U.S. dollar. Users generate Dai by depositing crypto-assets into Maker Vaults on the Maker Protocol. Users can access Maker Protocol and create Vaults through Oasis Borrow or other interfaces built by the community. On Oasis Borrow, users can lock in collateral such as ETH, WBTC, LINK, UNI, YFI, MANA, MATIC and more. Users can then borrow against their collateral in Dai, as long as it is within the collateral ratio, which ranges from 101% to 175%, depending on the risk level of the asset locked.
Collateralized Debt Positions
Collateralized Debt Positions (CDPs) are the smart contracts on the Maker Protocol that users can leverage to lock their collateral assets (i.e., ETH or BAT) and generate DAI.
CDPs can be thought of as secure vaults for storing the aforementioned collateral. To account for the volatility in the crypto collateral, DAI is often over-collateralized, meaning that the deposit amount required is typically higher than the value of DAI.
For example, users must spend $200 in ETH in order to receive $100 DAI, which is meant to account for the potential decrease in the value ETH. As a result, if ETH depreciates by 25%, the $100 in DAI would still be safely collateralized by $150 in ETH.
In order to recover the stored ETH, the user has to return the DAI and pay a stability fee.
Decentralized finance (DeFi) or Open Finance is one of the most promising areas of cryptocurrency and financial innovation. As a decentralized stablecoin, Dai is an important building block for the DeFi movement. DeFi is trying to reimagine existing financial systems to be more transparent, permissionless, trustless, and interoperable. One of the metrics used to measure the growth of DeFi is the amount of ether (ETH) locked in smart contracts as collateral, a metric called “ETH locked in DeFi.”
Dai (DAI) is built on Ethereum in accordance with the ERC20 standard for tokens. It differs from centralized, fiat-collateralized stablecoins because it is backed by crypto collateral held on the Maker platform as opposed to U.S. dollars held in a bank account at a financial institution. Dai can be bought and sold for fiat currency or other digital currencies.
The supply of Dai is based on demand. When a user deposits ETH or any supported ERC20 token into the Maker platform as collateral, Dai is created and loaned to the user at a collateral-to-loan ratio of 66%, which increases the supply of Dai. Conversely, when a user returns Dai plus accrued interest (referred to as the Stability Fee) to the Maker platform to retrieve her collateral, the supply of Dai decreases.
The Stability Fee is the floating interest rate charged to users who borrow Dai. Holders of the Maker token (MKR), the governance token of the Maker Platform, set the Stability Fee. They can vote to increase or decrease the Stability Fee in an effort to normalize Dai’s value relative to the U.S. dollar. A user must return all of the Dai she borrowed and pay her Stability Fee (in Dai) to the Maker Platform in order to redeem her collateral.
Dai Savings Rate
Dai holders can deposit their Dai into the Dai Savings Rate contract and earn a yield (referred to as the Dai Savings Rate) on their Dai. The Dai Savings Rate is a floating interest rate set by Maker token holders. If the market price of Dai is above $1 U.S. dollar, Maker holders can vote to decrease the Dai Savings Rate in an attempt to reduce demand for Dai and lower its market price towards $1 U.S. dollar. Alternatively, If the market price of Dai is below $1 U.S. dollar, Maker holders can vote to increase the Dai Savings Rate in an attempt to increase demand for Dai and raise its market price towards $1 U.S. dollar.
DAI Stablecoin Advantages And Use-Cases
No Account Minimum: Many individuals around the world lack the minimum quantity of assets needed to be eligible to open a bank account, but there is no minimum balance amount required to use DAI.
Stable Value: DAI can provide an alternative stable currency and means of financial inclusion for citizens living in locations with severe economic instability.
Decentralized Freedom: Because DAI is a transparent and permissionless system, it helps to ensure that users have greater unrestricted access to their own wealth. By contrast, some governments, such as those of Zimbabwe and Myanmar, have been known to impose limitations on the ability of citizens to access their fiat by instituting daily or monthly withdrawal caps on their bank accounts. In 2019, Zimbabwe imposed weekly withdrawal limits as low as 20 Zimbabwe Dollars (ZWD). Similarly, in 2021 the Myanmar government imposed daily withdrawal limits of 500,000 kyat (around $350 USD).
Income Generation: Through the DAI Savings Rate system, users leverage DAI tokens to earn income through lockup and interest generation. Since DAI is built on the Ethereum blockchain and thus leverages the network’s own consensus mechanism, it doesn’t have its own staking mechanism per se. However, the MakerDAO system enables owners of DAI tokens to earn returns by depositing DAI into a MakerDAO smart contract. This specialized smart contract system secures the user’s investment, which has no minimum and can be withdrawn at any time.
Fast and Cheap: In many situations, international wire transfer fees can be prohibitively high, and the time it takes to finalize a transfer can be disruptively long. With DAI’s nominal transfer fees and fast processing times, global transactions from one user’s wallet to another become much more transparent and efficient.
Always On: Traditional financial institutions only operate during “business” hours. Therefore, transactions through such institutions can remain pending for days, and only finalize once banking institutions are open and transfers have actually been processed. However, through DAI and the Ethereum blockchain, transactions can be completed at any time and on any day of the year in a matter of minutes.
Highly secure: The MakerDAO system has been known to conduct extensive audits and research to aid in ensuring the robust safety of the platform. Through mathematical analysis, developers formally verify all smart contracts and underlying protocol mechanisms that constitute the internal structure of the system. That said, always do your own research (DYOR) and understand the risks before using any DeFi protocol.
What Is So Special About It?
The price of DAI is kept in check through a system of smart contracts automatically executing themselves. If the price of DAI fluctuates too far from one dollar, Maker (MKR) tokens are burned or created in order to stabilize the price of DAI.
What Else Is Different?
DeFi And DAI
Should I Buy It?
One of the key benefits of DAI is that it provides the transactional benefits of a cryptocurrency with hardly any volatility due to its linkage to the U.S. dollar. DAI is an ERC-20 token that was built specifically to run on the Ethereum blockchain. ERC stands for “Ethereum Request for Comment,” which is the standard developed in 2015 that creates and enables smart contracts on the Ethereum network.
DAI can be purchased outright on either centralized cryptocurrency exchanges or DEXs. Using the Maker Protocol, you can also borrow DAI by depositing Ethereum-based assets as collateral to underwrite the amount of DAI borrowed. DAI requires a larger collateral deposit than the amount of DAI borrowed to ensure network liquidity. If the value of your crypto-collateral drops below the value of the issued DAI tokens, the collateral can be forfeited. However, if your collateral increases in value, your DAI borrowing limit increases proportionately. The Maker Protocol operates similar to an escrow account that holds collateral until the borrowed DAI and processing fees are returned.
Another benefit unique to DAI is how widely integrated it is within the Ethereum blockchain. Once bought or borrowed, it can be used in hundreds of decentralized apps including:
- Decentralized finance (DeFi)
- Non-fungible tokens (NFTs)
Here are a few other features worth considering.
1. Passive income
DAI also has a unique interest-generating program called the DAI Savings Rate (DSR). It allows users to put idle DAI tokens to work producing a variable interest income through a lockup period. Another passive income option is where the DAI owner deposits the tokens directly into a MakerDAO smart contract. The smart contract is programmed to automatically add interest to the account. The investment and accrued earnings can be withdrawn anytime and has no minimum deposit.
2. Decentralized freedom
DAI investors benefit from unrestricted access to their funds, thanks to DAI’s decentralized design. There are no intermediaries, approvals, or credit checks due to its permissionless and transparent system. That’s not always the case for other assets or fiat currencies.
3. Very secure
Routine audits, DAI’s secure integrated wallet, two-factor authentication, and other security measures boost the safety of the DAI ecosystem. Additionally, developers in the MakerDAO community verify all smart contracts on the blockchain to ensure liquidity and network viability.
DAI provides a tremendous amount of flexibility and utility, with the price stability of the U.S. dollar to boot. If you buy DAI, it can be used across the Ethereum network in a number of ways, including:
- Staking of idle tokens to produce interest income
- Borrowing DAI to buy other coins
- Using it as a stable investment to hold profits from other token sales
- For in-game purchases
One downside is potential loss of your overcollateralized asset if you borrow DAI on the Maker Protocol. Otherwise, the upside of this unique asset makes it an easy way to dip your toe into crypto through a viable investment worthy of serious consideration.