DAI is the first collateral-backed stablecoin that seeks to maintain a 1:1 value with the U.S. Dollar. DAI facilitates crypto-lending using the method of locking other crypto assets in a smart contract to get DAI as a loan. Whereas most stablecoins are controlled by centralized organizations, DAI is decentralized. As a stablecoin, DAI serves as a hedge against market fluctuations and also enables some DeFi features such as trading, lending, or borrowing.

What Is DAI?

DAI is a decentralized cryptocurrency and a stablecoin built through a smart contract on the Ethereum Blockchain. It was created as an ERC token which makes it compatible with many use cases on the Ethereum network, including the creation of smart contracts.
The origin of DAI is traced to MakerDAO, an open-source project launched by Rune Christensen in 2014. Maker DAO metamorphosed into a Protocol in 2015 when Christensen brought together a group of developers to design a solution that would create a credit system for taking out loans using crypto as collateral. This idea gave birth to DAI, which was launched on Maker Protocol in 2017. DAI aims to be a stablecoin that will not only serve as a hedge against volatility but also as a facility for taking loans using cryptocurrencies as security and backup.

After the launch of DAI, Christensen relinquished the authority over the project to Maker DAO, which is a decentralized autonomous organization. Maker DAO is run by the holders of its native token, Maker (MKR). The decentralized organization is responsible for ensuring price stability and regulating the value of DAI, which is pegged to the U.S. Dollar (that is, I DAI equals I US Dollar). The holders of this governance token, Maker (MKR), enjoy the right to vote on decisions that will further develop Maker DAO’s smart contracts as well as DAI.

Key Features of DAI

There are certain unique features that distinguish DAI from other stablecoins. These features include:

1. Decentralization:

   There are many other stablecoins aside from DAI that also strive to mitigate the volatility of the crypto market. DAI, however, has an unprecedented degree of decentralization compared to others.
   For example, Tether (USDT), which is also a stablecoin, is backed by a reserve of fiat currency managed by a central organization. DAI, on the other hand, does not have one central entity which controls its issuance. Instead, users who desire to hold DAI submit Ethereum-based assets into a smart contract. The Smart contract uses the assets submitted as collateral in maintaining DAI’s value to the U.S. dollar.

2. Crypto-collateralized stablecoin:

   Stablecoins use different kinds of assets to which they are pegged as collateral. Some like Tether, USD Coin (USDC) use fiat, and this is the most common. Some others, such as Kowala, and Eternal Fragment, are based on an algorithm, a software-based economic model. There are also stablecoin like Reserve and Saga that adopt a blend of approaches. DAI specifically is a crypto-collateralized stablecoin. While it adopts traditional financial infrastructure, it uses cryptocurrencies as collateral. Other crypto-collateralized stablecoins include Synthetix (Synth) formerly known as Havven & USD, and Bitshares (BTS) BitUSD.

3. Multi-Collateral System:

   DAI, unlike most stablecoins, can use multiple cryptocurrencies as collateral, including ether (ETH), basic attention token (BAT), nUSD Coin (USDC), wrapped bitcoin (wBTC), compound (COMP), and many more. At first, the Maker Protocol only accepted ether as collateral. However, the technology was updated in November of 2019 to include BAT and USDC, resulting in today’s multi-collateral DAI system. The increased number of collateralizable currencies reduces user risk and improves the price stability of DAI. The MakerDAO community’s voting continues to add new collateral options.

4. Incentives against system collapse:

   Holders of DAI tokens earn passive income through interest on their DAI. Those who own MKR, Maker Dao’s native governance token, determine the DAI Savings Rate (DSR) and serve as DAI guarantors, which means their MKR tokens can be liquidated if the system fails. This structure incentivizes guarantors to ensure the DAI system and its collateralized tokens function properly.

How Does DAI Work? Collateralized Debt and Maker Collateral Vault

DAI is soft-pegged to U.S. Dollar, which means it is not backed by U.S. Dollar but maintains its value by using collateralized debt denominated in Ether (ETH). Users willing to generate and borrow DAI can leverage the Maker collateral vault through MakerDAO’s Oasis Borrow dashboard and deposit Ethereum-based assets as collateral.

The Maker Collateral Vault, previously known as Collateralized Debt Positions (CPD), serves as an escrow that holds the collateral until the borrowed DAI is returned.
When borrowing DAI, you must provide security equal to at least 150 percent of the loan amount. As a result, you unlock more money in security than the loan’s value. If the security falls below 150 percent, the deposited security is sold (liquidated), and the borrower is charged a small fee. Because cryptocurrency volatility is high, there is a risk of being liquidated if such a large safety margin is not used.

Let us say Mr. A wants 100 DAI, which is equivalent to the value of 100 US dollars; he must deposit Ethereum worth at least 150 US dollars in Maker Protocol’s smart contract. If the $ 150 in Ethereum falls in value to, say, $ 149 in Ethereum, the Maker Protocol smart contracts will automatically sell the Ethereum that was used as collateral.
The Protocol ensures that the value of the collateral Mr. A deposits is never less than the amount he borrows. It is therefore prudent to leave some room for error.

Why People Borrow DAI Despite the Required Higher Value Collateral

There are reasons people borrow DAI despite the fact that they have to deposit more than what they borrow in collateral. One of these primary reasons is to have liquidity and money available without having to sell their cryptocurrency. DAI allows people to speculate on new cryptocurrencies without having to sell their existing ones. Also, you can lock in cryptocurrencies and take out DAI loans because DAI is supported by a number of interest-bearing funds. In practice, this means that investing borrowed DAI in an interest-bearing fund can earn annual interest. As a result, the interest you pay on a loan is lower than the interest you could earn by investing DAI in various other interest-bearing services. If the interest you receive exceeds the cost of taking out the DAI loan, you will be able to make money by borrowing DAI.

Advantages of DAI

• No Account Minimum: DAI does not require a minimum balance amount which makes it suitable for all forms of users.

• Decentralized Freedom: The decentralized nature of DAI makes it transparent. Users have a higher degree of control over their assets, unlike many restrictions that are common to the traditional financial systems.

• Passive income: DAI also has a one-of-a-kind interest-generating program known as the DAI Savings Rate (DSR). It enables users to put idle DAI tokens to work, earning variable interest income over a set period of time. Another option for passive income is for the DAI owner to deposit the tokens directly into a MakerDAO smart contract. The smart contract is set up to deposit interest into the account automatically. The investment and earnings can be withdrawn at any time, and there is no minimum deposit.

• Stable value: DAI is an alternative stable currency and one of the largest stablecoins by market capitalization. The stable value makes it ideal for crypto-lending, considering the challenges of executing loans between two volatile cryptocurrencies. DAI strives to minimize volatility and can be very useful during economic instability.

• Security: the DAI ecosystem places a high premium on security through routine audits, secure integrated wallets, two-factor authentication, and other measures. Furthermore, developers in the MakerDAO community verify all smart contracts to guarantee network viability.

Disadvantages of DAI

• The fact that DAI is crypto-collateralized makes it prone to fluctuation.

• The number of trading pairs is a factor that affects the liquidity of DAI.

Is DAI a Good Investment?

DAI is an ERC token that serves a number of use cases. The primary goal of DAI is to enable crypto lending with fewer challenges from volatility. DAI is soft-pegged to the U.S. Dollar to keep the price stable. Dai has greater stability and liquidity than the majority of other cryptocurrencies, but it is not a viable choice for investors looking for quick returns on their investments.
Dai also provides investors with more transparency than other stablecoins provide. Unlike the majority of other coins, it has been examined by independent security firms and software analysis companies. There is however a certain level of risk in holding DAI, which stems from its probable loss of the dollar peg, which in turn can be caused by multiple factors, both technical and market.

How to Own DAI?

One way to own FTM is to go through a crypto centralized exchange, so the first step is to create a Gate.io account and complete the KYC process. Once you have added funds to your account, check out the steps to buy FTM on the spot or derivatives market.

News on Dai

According to news circulated in October 2022, the Maker Protocol’s regulatory body, MakerDAO, has started the process of converting $500 million of its stablecoin Dai collateral reserves short-term United States Treasuries and corporate bonds. The MKR holders chose the asset allocation, with 68,250 MKR representing 57.67% of the overall voting pool. MakerDAO has adopted the strategy as a way to diversify the holdings that are currently used as collateral for DAI, while also enabling the DAO to deploy unspent capital and give the protocol more income without putting MakerDAO’s solvency or the DAI peg at undue danger.

Useful References

For the latest updates about Dai and MakerDao, you can visit:

• The official website
• Twitter
• Telegram
• Reddit
• Discord
• GitHub

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