What is DAI?
DAI is a stablecoin created by MakerDAO, a decentralized lending and borrowing platform on the Ethereum network.
The Long Definition
DAI is a stablecoin. This is a type of cryptocurrency that keeps its value ‘stable’ by maintaining a peg to some other asset. In this case, DAI is pegged to the value of the US dollar, so its value is always $1.
This stablecoin was created by MakerDAO and launched on the Ethereum blockchain. It is backed by Ethereum and other cryptocurrencies. By serving as collateral, these assets help it maintain its peg to the dollar.
DAI is mainly used in MakerDAO’s lending/borrowing platform. You can also find it on both centralized and decentralized exchanges.
Why was DAI created?
A defining characteristic of crypto assets is their volatility. Crypto tokens and coins tend to undergo sudden price fluctuations. While this is a good thing for traders, as it allows them to make a profit by timing their buy and sell actions right, it’s not good for people who want to use their crypto as a currency.
In fact, volatility discourages people from using crypto. This is bad because one of the main goals of digital currencies is to power a decentralized, peer-to-peer (P2P) payment system. The idea is for people to use crypto just like they use fiat money.
But given how volatile cryptocurrencies are, this has become a hard thing to do. So, what’s the solution?
Well, create stable assets whose values don’t undergo significant price fluctuations. These are known as stablecoins. Their value remains constant because they’re pegged to something of a stable value, like the dollar, pound, or euro.
DAI is a stablecoin launched in December 2017 on the Ethereum blockchain by MakerDAO, a decentralized autonomous organization (DAO).
How does DAI work?
DAI’s value is pegged to the US dollar. So, its price should always be one dollar. How does it do that?
DAI is a crypto-backed stablecoin. This is a class of stablecoins backed by other cryptocurrencies. In this regard, the token is backed by ether (ETH) and other crypto assets in much the same way that the dollar was once backed by gold.
But, this presents an interesting problem. ETH is a volatile cryptocurrency, so using it as a reserve currency still carries the volatility that DAI is trying to avoid. To solve this problem, crypto-backed stablecoins are overcollateralized.
This means that there is more ETH in reserve than the token needs to maintain its value. Instead of maintaining a 1:1 ratio, the ratio of DAI to ETH is more, like 1:1.5 or higher. Therefore, even if the value of ETH drops, DAI will still be worth $1.
How are new tokens minted?
New DAI tokens are minted on the MakerDAO protocol, which is a decentralized platform on the Ethereum blockchain. People generate new DAI tokens by borrowing from the platform. This acts as the primary way through which new DAI tokens enter circulation.
To get a loan, you’ll have to lock up ETH or other accepted cryptocurrencies in the protocol’s smart contracts. This serves as collateral and backs the newly minted DAI tokens that you receive as your loan.
You’ll only be able to withdraw your collateral after repaying your borrowed amount in DAI. The protocol then burns the returned DAI. This ‘mint/burn method’ helps control the amount of DAI in circulation.
What is DAI used for?
DAI is mainly used in decentralized loans on MakerDAO. It is also an ERC-20 token. ERC-20 is a standard set by the Ethereum blockchain.
Being ERC-20 means DAI is compatible with many other protocols in the decentralized finance (DeFi) space. This makes it one of the most popular cryptocurrencies in DeFi.
It also has a stable value. Thus, you can use it to buy goods and pay for services.
What makes this stablecoin different?
DAI isn’t the only stablecoin; there are many others, like Tether and USDC. However, this token is unique in one important way: it is decentralized.
Unlike other stablecoins, DAI isn’t controlled by a centralized organization. MakerDAO, the platform that generates DAO, is decentralized.
Where can I get DAI tokens?
You can get DAI on the MakerDAO platform as a crypto loan, but that’s not the only way to get the tokens.
You can also buy tokens at centralized exchanges (CEXs) such as Coinbase, Binance, Gemini, Kraken, and others.
Finally, you can also swap other cryptocurrencies for DAI at decentralized exchanges (DEXs) like Uniswap, Pancakeswap, and Compound.