What is Dai?


Dai is a decentralized stablecoin that runs on the Ethereum blockchain. Unlike most cryptocurrencies, which are highly volatile, Dai is designed to maintain a stable value relative to the US dollar. This means that the value of Dai should remain relatively constant, making it a more stable and reliable store of value than other cryptocurrencies.

Key takeaways

  • Dai is decentralized stablecoin engineered to keep a steady value relative to the US dollar.

  • A decentralized stablecoin operates differently than other cryptocurrencies since its creation and governance is in the hands of a decentralized autonomous organization (DAO).

  • To keep its value stable, Dai uses a sophisticated system of smart contracts built on the Ethereum blockchain to collateralize various assets, such as Ether (ETH). 

  • By backing the value of the stablecoin with these assets, Dai’s value remains stable and reliable, even amidst the volatility of the cryptocurrency market.

Dai’s main advantage is that it is a decentralized stablecoin, which means that not a single entity controls it. This reduces the risks associated with traditional forms of money such as inflation and government seizure. Because it operates on a blockchain network, Dai is fully transparent. It allows users to verify that their stablecoin has real asset backing.

This is beneficial not only for retail but for any international business that operates across borders, as it eliminates the need to convert between different currencies, which can be both costly and time-consuming.

Overall, Dai is an innovative and unique stablecoin that provides a stable and dependable store of value thanks to its decentralized nature and collateralization system.

What is a decentralized stablecoin?

Decentralized stablecoins are cryptocurrencies that maintain a stable value relative to a specific asset, such as the US dollar. Unlike typical cryptocurrencies, decentralized stablecoins aim to offer a more consistent and reliable store of value by avoiding the significant price fluctuations associated with many crypto coins.

DAOs are the ones who create and manage these stablecoins. They use smart contracts on blockchain platforms like Ethereum to collateralize various assets. These assets can be other cryptocurrencies or even traditional assets. This collateralization ensures that the stablecoin’s value remains stable and can be redeemed for the underlying assets at any time.

Since they aren’t controlled by a single entity, decentralized stablecoins aren’t any vulnerable to the same risks as traditional forms of currency, such as government seizure or inflation. Moreover, their use of blockchain technology and smart contracts ensures transparency and accountability. Users can confirm that their stablecoins have backing by genuine assets.

How does Dai work?

Dai uses a unique system of smart contracts to ensure its value remains stable relative to the US dollar. Created and managed by a decentralized autonomous organization (DAO) called MakerDAO, Dai’s backing includes various assets like Ether (ETH) – collateralized to maintain its value.

To obtain Dai, users deposit collateral into a smart contract on the Ethereum blockchain. The same deposit generates an equivalent amount of Dai that they can use for various purposes. The value of the collateral stays monitored continuously to ensure that it remains above a certain threshold. If it falls below, the smart contract will automatically sell the collateral to maintain the value of Dai.

One unique feature of the stablecoin is that people can use it for borrowing and leveraging. This allows users to potentially earn higher returns but also exposes them to additional risks. Dai’s decentralized nature and use of smart contracts provide transparency and accountability, making it a reliable store of value.

Users who hold the stablecoin can also use it as collateral to borrow additional funds. These are “Maker Dai,” they provide additional collateral to the smart contract. This enables DAI holders to increase their returns by leveraging their assets, but it also exposes them to additional risks. If the value of the collateral drops below the required collateralization ratio, a liquidation event may trigger, leading to loss of funds.

Dai’s decentralized nature and innovative collateralization system make it a secure and dependable value store. The transparency presented by the use of smart contracts is another advantage. Moreover, so is the flexibility provided by the ability to borrow and leverage assets. All of these factors contribute to the increasing utility and value of the DAI token and its ecosystem.

How does it compare to Tether?

When comparing Dai and Tether stablecoins, there are several key differences to consider. Dai is collateralized through smart contracts on the Ethereum blockchain, creating a transparent and decentralized process. Meanwhile, Tether uses traditional assets, such as cash reserves, held by a central organization, leading to questions about transparency.

In terms of management, a decentralized autonomous organization (DAO) called MakerDAO manages Dai, which uses smart contracts to create and maintain the stablecoin. On the other hand, Tether Limited manages Tether. It’s a centralized organization with full control over the issuance and management of the stablecoin.

Both Dai and Tether aim to maintain a stable value relative to the US dollar, but Dai’s use of a decentralized collateralization system and smart contract technology may provide more resistance to sudden changes in value compared to Tether. Ultimately, the differences in their collateralization and management make each stablecoin unique in its own way.

Maker Protocol

The Maker Protocol is a cutting-edge software system that operates on Ethereum’s blockchain. This protocol is the backbone of MakerDAO, a decentralized autonomous organization responsible for the creation and management of Dai.

The Maker Protocol employs a series of intelligent contracts to lock up different assets. These assets include Ether (ETH), as a form of security for the Dai stablecoin. This security ensures that it maintains its stability and users will always have the option to trade in their stablecoin for the underlying assets.

This software protocol uses a smart contract infrastructure called “vaults” to allow users to lend and borrow cryptocurrencies. Maker vaults work as digital contracts that manage cryptocurrency lending and borrowing on behalf of users.

In addition to the stablecoin, the Maker Protocol also has the Maker (MKR) token, which serves as a governance token that gives holders the ability to participate in decision-making processes within the MakerDAO DAO. This includes voting on critical system parameters, such as changes to the collateralization ratio.

Maker Protocol is undeniably crucial to the ever-growing decentralized finance (DeFi) ecosystem on the Ethereum blockchain. Its smart contracts used for collateralization and governance encouraged innovation and adoption in the DeFi space.


Frequently asked questions about DAI.

Who are the creators?

MakerDAO is a decentralized autonomous organization (DAO) operating on Ethereum that’s responsible for creating and managing Dai. It’s essential to understand that this stablecoin is not under any single entity’s control, but rather it is decentralized and operates within the rules and protocols of the Ethereum blockchain. 

How do new tokens come into circulation?

When users deposit collateral into a smart contract on the Ethereum blockchain, new Dai tokens generate. These tokens have various use cases, such as facilitating payments or trading on cryptocurrency exchanges. The MakerDAO system accepts any supported asset as collateral, though Ether (ETH) is currently the type participants most commonly use.

To maintain Dai’s value, the smart contract continuously monitors the deposited collateral’s value to ensure it stays above the “collateralization ratio.” If the value drops below the threshold, the contract can automatically sell the collateral. This process is decentralized and transparent. It allows users to verify their Dai’s backing by real assets at any given time whatsoever. This feature is one of the significant benefits of the stablecoin compared to traditional forms of currency that institutions and governments centralize and control.

Where do I buy DAI?

The fastest and admittedly most convenient way to buy it is via the exchanges that support it: Binance, Kraken, KuCoin and Coinbase. The market cap and circulating supply of the stablecoin determines the DAI price.

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