DAI is a cryptocurrency categorized as a stablecoin. It aims to keep its value consistent with the U.S. dollar at a 1:1 ratio. It has its own decentralized governing organization, MakerDAO, to regulate its value. It was one of the first to successfully transition from a company to a decentralized autonomous organization (DAO).
Users can generate DAI through the Maker Protocol, a system that leverages locked up collateral to generate the token. Users can use other cryptocurrencies as collateral or buy DAI using traditional fiat currencies on cryptocurrency exchanges like Coinbase.
What makes DAI different?
A framework of self-executing smart contracts autonomously controls the price of DAI. If DAI's price deviates from USD, MakerDAO's algorithms will create or burn tokens to stabilize DAI's price.
As a result, DAI's stability is not dependent on a single party. An effective algorithm benefits token holders since burnt tokens increase the value of existing ones. This system has seen DAI maintain a relatively stable value for over four years.
What’s a stablecoin?
A stablecoin is a type of cryptocurrency pegged to another asset, like the U.S. dollar, or precious metals like gold. Stablecoins aim to reduce the volatility of cryptocurrencies such as bitcoin, ether, or dogecoin.
Stablecoins provide an alternative option to conventional cryptocurrencies while offering secure transactions, borderless payments, and low transaction charges, making them convenient for daily use.
How does DAI work?
DAI's value remains relatively stable due to stored collateral that backs up its value. For every $1 of DAI, there is more than $1 of other cryptos that back it. As a result, DAI holds value. Other cryptocurrencies act as collateral for DAI to maintain this value against the US dollar. DAI uses Ethereum (ETH) and other Ethereum-based cryptos as collateral and smart contracts on the Ethereum blockchain.
As mentioned, DAI's Maker Protocol has built-in algorithms that allow users to generate and deposit DAI in Maker Vaults, which enable users to deposit cryptocurrencies as collateral, after which they can generate DAI. The user receives DAI in the form of a loan. Users can pay DAI back with a stability fee and get back their collateral.
Simply put, think of Maker Vaults as banks and DAI as a loan. When you ask your bank for a loan, the bank requires you to provide some form of collateral proof of future repayment. Similarly, users generate DAI against their collateral.
What is the Maker Protocol?
The Maker Protocol, also called the Multi-Collateral Dai (MCD) system, is a smart contract system that allows users to generate DAI. Users can leverage collateral—usually in the form of other cryptocurrencies—after approval by the “Maker Governance.”
The Maker Governance community operates within the rules of MakerDAO and ensures DAI remains a decentralized, collateral-backed stablecoin that aims to maintain a stable 1:1 value with the U.S. dollar.
MakerDAO’s Maker Protocol White Paper claims, “DAI is resistant to hyperinflation thanks to its low volatility, offering economic freedom and opportunity to anyone, anywhere.”
What happens if the collateral’s value decreases?
Any collateral deposited must always be worth more than the DAI received. If the value of any collateral decreases or falls below the value of the allocated DAI tokens, the collateral will be liquidated. If at any point DAI is collateralized, it’ll lead to autoliquidation.
Maker Vaults are essentially smart contracts that store collateral in escrow until the loaned DAI is repaid. They were formerly known as collateralized debt positions (CDPs) in an older version of the Maker Protocol.
What can you do with DAI?
DAI is the seventh-largest cryptocurrency by market cap (at the time of writing). Its unique structure has grown in popularity, making it a versatile and practical cryptocurrency for real-world use. To understand its practicality, it’s important to go through DAI’s various applications:
Inflation protection and savings
Fiat currencies such as the U.S. dollar, the British pound, and the euro tend to remain highly stable. However, these currencies are not easily attainable for citizens residing in developing countries. Many of these countries experience economic unrest with fluctuating economies. As a result, the exploration of cryptocurrencies has become a popular activity. DAI is a stablecoin that users can buy from various online crypto exchanges using different cryptocurrencies as collateral. As mentioned, stablecoins offer low transactions and fast, efficient, borderless payments.
Being a decentralized cryptocurrency, DAI has no central authority, eliminating the need for users to go through intermediaries. Instead, DAI holders can store their cryptocurrency in crypto wallets, where they enjoy full custody of their digital assets.
DeFi products and services
DAI continues to be the most commonly used cryptocurrency in the decentralized finance (DeFi) space. DAI's versatility allows it to be compatible with any decentralized application (dApp) on Ethereum's network. As a result, anyone with an internet connection can access dApps and the specific products and services they offer.
Cryptocurrencies aim to offer a system of efficient, global, fast transactions. E-commerce sites accepting DAI as payment don’t have to worry about huge fees, chargebacks, or DAI’s volatility.
An increasing number of businesses are embracing the idea of cryptocurrency as a form of payment, with DAI-powered debit cards now available through Visa or Mastercard.
Understanding DAI: Points to know before investing
DAI uses other forms of cryptocurrency as collateral, making it a partially decentralized stablecoin. This is because much of DAI’s collateral exists in the form of USDC, a centralized, fiat-backed stablecoin. However, its association with other cryptocurrencies, especially Ethereum-based ones, makes it a versatile and practical option for users. DAI has survived many market conditions, making it a relatively durable stablecoin by design, unlike failed stablecoins like TerraUSD (UST).
DAI’s price can fluctuate, with the value sometimes going slightly over or under $1. DAI corrects this by using smart contracts built into its protocol.
Why should I buy DAI?
The Maker Protocol white paper claims DAI has low volatility. Its track record has shown DAI to be relatively stable. Additionally, it’s the most-used cryptocurrency in the DeFi space and can act as a secure form of passive income.
- Passive income – DAI offers a program called the DAI Savings Rate (DSR), which allows users to deposit idle tokens and earn interest. Users can also put DAI tokens into MakerDAO smart contracts that automatically credit accounts with interest. Users can withdraw their accrued earnings at any time with no minimum deposit.
- Security – DAI offers an integrated crypto wallet, two-factor authentication, and routine inspections to ensure safety. To maintain liquidity and sustainability, the Maker Governance and MakerDAO developers validate smart contracts and perform audits on the blockchain.
How can I start with DAI?
DAI’s track record proves it offers versatility, low volatility, and security in the crypto ecosystem. As the top stablecoin in the DeFi space, more and more users are embracing DAI and its features. But it’s not the only cryptocurrency that’s growing.
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