One of the first stablecoins to come into existence, Dai was launched in 2017 and is maintained and regulated by MakerDAO. Using a series of smart contracts, Dai maintains a value of $1, or very close to it. Due to the coin’s soft peg to the US dollar, the Dai stablecoin not only provides a stable long-term store of value but also a strong medium of exchange.
Let’s explore what Dai is and how it contributes to the crypto ecosystem.
What Are Dai tokens?
Dai is an ERC-20-based stablecoin pegged to the US dollar. While more stablecoins hold the fiat currency to which they are pegged in reserves, the Dai stablecoin instead uses several cryptocurrencies to ensure it holds its peg.
Supported cryptocurrencies include Ethereum (ETH), (BAT), USD Coin (USDC), Wrapped Bitcoin (wBTC), Compound (COMP), and many more. With a wide range of collateralized cryptocurrencies, user risk is decreased and Dai's price stability is increased.
Dai is issued and operated by the Maker Protocol and the MakerDAO (decentralized autonomous organization). Designed to provide a means of lending and borrowing crypto assets, the Dai stablecoin was at the forefront of the DeFi revolution.
Holders of Dai can also earn interest. The platform also has another coin, MKR, which allows holders to set the Dai Savings Rate (DSR) and act as guarantors for Dai. This ensures that MKR tokens can be liquidated if the system fails. This structure motivates guarantors to ensure that the Dai system and its collateralized coins operate properly.
How do you generate Dai?
Users can generate Dai by paying collateral assets. Dai is created when users deposit ETH or any supported cryptocurrency as collateral. The equivalent amount of Dai is then issued and the user will receive Dai tokens.
If the Dai holders want the collateral assets back, the borrowed Dai can be paid back (plus a stability fee) and the collateral assets will be released. This Dai is then removed from circulation.
History of the Dai Stablecoin
The MakerDAO was first launched in 2015 by Rune Christensen and is the longest-running protocol on the Ethereum blockchain to date. It holds more than 2.3 million ETH in its protocol, approximately 2% of Ethereum’s total supply.
When first created, only Ether could be used as collateral, however, in 2019 more cryptocurrencies were added to this list. The Dai price has always been soft pegged to the US dollar.
How Does DAI Work?
The Dai cryptocurrency is an ERC-20 token that can be bought on both centralized and decentralized exchanges (DEXs). Users can also generate and borrow Dai by using MakerDAO's Oasis Borrow dashboard to establish a Maker collateral vault and put Ethereum-based assets in as collateral.
In its original use, the Maker protocol stored collateral in smart contracts known as maker collateral vaults. These smart contracts held collateral in escrow until the borrowed Dai was repaid, also known as collateralized debt positions (CDPs). The value of the security you send always exceeds the amount of DAI you receive otherwise the collateral will be liquidated.
The Dai platform is one of the most integrated digital assets in the blockchain industry and can be utilized across decentralized finance (DeFi) applications and blockchain-based games, among other places.
The Advantages of DAI
No Minimum Amount Required
There is no minimum account balance required to use DAI, as there is with most other types of money. A lot of people around the world do not have the minimal amount of assets needed in order to qualify for a bank account, but there is no minimum balance requirement for utilizing DAI.
DAI can serve as a safe alternative store of money and access to financial inclusion for people who live in places where the economy is unstable.
Decentralized Financial Inclusion (smart contracts)
As DAI is a transparent and permissionless system, it allows users to have greater freedom over their money. Zimbabwe and Myanmar, for example, have been recognized as countries where people are limited in their ability to access fiat currency due to daily or monthly withdrawal restrictions on bank accounts imposed by the government.
Users can use DAI tokens to earn money through lockup and interest generation through the DAI Savings Rate system. Because DAI is based on the Ethereum blockchain, it doesn't have its own staking mechanism.
Owners of DAI tokens, on the other hand, may profit by putting DAI into a MakerDAO smart contract. This unique smart contract system protects the user's money and allows for immediate withdrawal.
Quick And Cost-Effective Transactions
In many cases, international wire transfer fees can be extremely high, and the time it takes to complete a transaction might be inconvenient. Global transactions between two users' wallets are made more transparent and efficient due to DAI's low transfer fees and quick processing times.
Traditional financial institutions operate only during "business" hours. As a result, transactions through such organizations may be delayed for days and will only finalize after banking institutions are open and transfers have been completed. Transactions can now be completed at any time of the year and on any day of the week using DAI and the Ethereum blockchain.
The MakerDAO system has been found to conduct thorough checks and studies in order to guarantee the platform's security. Developers formally validate all smart contracts and core protocol elements that make up the system's internal architecture through mathematical analysis. Always DYOR (Do Your Own Research) and fully understand any DeFi protocol before using it.