What is Dai?
Dai (DAI) is a stablecoin based on the ERC-20 token standard. It runs on the Ethereum blockchain. Being a stablecoin means that it’s backed by fiat currencies instead of other cryptocurrencies. Most notably, the Dai token is soft pegged to the US Dollar just like the largest stablecoin Tether. However, unlike Tether, Dai is completely decentralized.
In a broader sense, this means that the current DAI price stability depends on keepers. Their role is to maintain stability through buying and selling Dai when the market price is below or above 1 US Dollar. In addition, stability fees and the Dai Savings Rate (DSR) mechanism are used in maintaining the stability of the stablecoin.
Dai belongs to the MakerDAO ecosystem along with the Maker (MKR) token. The latter is a utility token that grants governance rights. In addition, MKR is used to pay for the fees associated with Dai loans. Whereas Dai is the native token of the Maker for day-to-day needs.
It’s Multi-Collateral, unlike its Single-Collateral predecessor Sai. This means that Dai-based loans can be collateralized by multiple cryptocurrencies. Sai was the initial stablecoin of the MakerDAO. The new and upgraded version called Dai was introduced in November 2019.
Don't forget to check the DAI price on the graph above if you're considering purchasing this cryptocurrency.
How does Dai Work?
Dai enables the lending and borrowing of cryptocurrencies in a decentralized manner. It has many similarities to the traditional method of taking out loans except Dai loans don’t have any of the strict requirements that banks do. All you have to do is deposit the accepted crypto collateral such as ETH or USDC into the Maker Vault and collect your Dai. No credit scores, credit history, cash flows, financial statements, or any other personal information through KYC processes is required.
In order to redeem your collateral, you must pay back the exact Dai amount owed in addition to a stability fee a.k.a. interest rate.
Besides generating Dai by depositing collateral into a Maker Vault, you can also purchase it via an exchange where you’ll have to consider the current DAI price.
What are the Main Features of Dai?
There are various advantages of Dai that puts it ahead of other stablecoins on the market.
Starting off with the most obvious aspect - decentralization. When asking the question of what is Dai, you’ll most likely hear that it’s a decentralized stablecoin. Decentralized is the key word here as there are stablecoins with a central authority. Decentralized stablecoins lack said central authority which means that they’re governed by the community through public voting via the MKR token. Moreover, decentralization brings forward features such as increased transparency and resistance to censorship. This is possible since all actions are recorded on the blockchain.
It’s no secret that the crypto market is extremely volatile. Therefore, when wondering what is Dai and how it can benefit you, you should first consider this aspect. Stablecoins such as Dai help in managing volatility. The value of Dai is soft pegged to the US Dollar which ensures relative stability. This means that the DAI price should be around 1 US Dollar.
The Maker employs a Dai Savings Rate (DSR) mechanism which serves as a source of passive income. This unique feature enables users to earn interest. This form of passive income is funded by the stability fee.
Last but not least, Dai comes with inherent dApp composability and open access to the source code.
What is MakerDAO?
MakerDAO is a decentralized autonomous organization where participants can take out collateral-backed crypto loans. It’s powered by the native stablecoin DAI and the governance token MKR.
Participants can generate the native DAI token by depositing collateral into the Maker Vault. This collateral can be any type of cryptocurrency that is supported by the platform.
Who Developed Dai?
Rune Christiensen, who is an entrepreneur of Danish descent, co-founded the MakerDAO in December of 2017. Dai token and the Maker token power the ecosystem.
Since the Maker is a decentralized autonomous organization (DAO), it fully operates without a central authority by utilizing smart contract technology.
This is where MKR comes in. This utility token serves the purpose of a governance token. MKR holders receive voting rights in crucial decisions regarding MakerDAO’s future development.
This means that even though Rune Christiensen originally founded the DAO, he doesn’t hold any significant power over its development or token issuance.