The first decentralized, collateral-backed cryptocurrency, DAI is a crypto asset that attempts to maintain a price of 1 U.S. dollar per 1 DAI by locking other crypto assets in contracts.

This means that unlike other asset-backed cryptocurrencies, which may be issued by for-profit companies, DAI is the product of an open-source software called the Maker Protocol, a decentralized application running on top of the Ethereum blockchain.

As such, DAI maintains its value not by being backed by U.S. dollars custodied by a company, but by using collateralized debt denominated in ether (ETH), Ethereum’s cryptocurrency.

If you’re unfamiliar, collateralized loans provide a way for a lender to secure a loan using assets they own. Historically, these loans have a lower interest rate than unsecured loans, as they allow lenders to seize the asset and sell it in the event borrowers are unable to pay the loans.

The Maker Protocol, through smart contracts running on Ethereum, enables borrowers to lock ETH and other crypto assets, thus collateralizing it, in order to generate new DAI tokens in the form of loans.

If borrowers wish to recover the locked ETH, they will have to return the DAI to the protocol and pay a fee. In the event of liquidation, the Maker Protocol will take the collateral and sell it using an internal market-based auction mechanism.

Due to its design, the supply of DAI cannot be altered by any party in the network. Rather, it is maintained through a system of smart contracts designed to dynamically respond to changes in the market price of the assets in its contracts.

For more regular updates from on the project, you can bookmark its official Medium blog, which includes tips and tutorials on the network and its evolving technology.

Who created Dai?

Founded in 2014 by Rune Christensen, the Maker Foundation created the Maker Protocol, an open-source project whose goal was to operate a credit system that would allow users to take out loans collateralized by cryptocurrencies.

DAI officially launched on the Maker Protocol in 2017 as a means to provide a non-volatile lending asset for businesses and individuals.

The Maker Foundation eventually gave up control of the software to MakerDAO, a decentralized autonomous organization that now governs the Protocol.

How does Dai work?

DAI is a crypto asset that is collateralized by other cryptocurrencies.

If users want to acquire DAI, they can spend ETH to purchase the dollar equivalent amount in DAI on an exchange or they can collateralize ETH and other assets using the Maker Protocol.

The latter method allows users who do not want to sell their ETH to still acquire DAI.

DAI works through a system of collateralized debt positions (CDPs) and a special mechanism to maintain its peg to the US dollar. Here’s a breakdown:

Creating DAI:
- Users deposit cryptocurrencies like Ether (ETH) or other accepted assets into a CDP, which is a smart contract on the Ethereum blockchain.
- The value of the deposited crypto must be more than the DAI you want to create (overcollateralized). This protects the system from crashes in the collateral’s value.
- By locking up collateral, users essentially borrow DAI against its value.
Maintaining the Dollar Peg:
- DAI uses a mechanism called the Target Rate Feedback Mechanism (TRFM).
- If DAI’s price dips below $1, the TRFM increases. This makes it more attractive for users to buy DAI, which increases demand and pushes the price back up towards $1.
- Conversely, if DAI goes above $1, the TRFM discourages buying, causing the price to fall.
Repaying DAI:
- To get their collateral back, users need to repay the borrowed DAI along with a stability fee.
- When DAI is repaid, it gets destroyed, helping to regulate the total supply of DAI in circulation.

Here’s an analogy: Imagine a safety deposit box at a bank. You put your valuables (crypto) in the box (CDP) as collateral and borrow cash (DAI) against its value. The bank (MakerDAO) keeps an eye on the value of your valuables to make sure it stays well above the amount you borrowed. If the value drops, you might need to add more collateral or risk losing your valuables.

Collateralized debt positions

Collateralized Debt Positions (CDPs) are the smart contracts on the Maker Protocol that users can leverage to lock their collateral assets (i.e., ETH or BAT) and generate DAI.

CDPs can be thought of as vaults for storing the aforementioned collateral. To account for the volatility in the crypto collateral, DAI is often over-collateralized, meaning that the deposit amount required is typically higher than the value of DAI.

For example, users must lock up $200 in ETH in order to receive $100 DAI, which is meant to account for the potential decrease in the value ETH. As a result, if ETH depreciates by 25%, the $100 in DAI would still be safely collateralized by $150 in ETH.

In order to recover the stored ETH, the user has to return the DAI and pay a stability fee.

Why is DAI useful?

Stablecoins like DAI can offer traders a powerful tool for avoiding the sometimes extreme volatility of the many cryptocurrencies whose prices are determined by the open market.

For example, by moving value to DAI, a trader might reduce their risk of exposure to a sudden drop in the price of Bitcoin or Litecoin. However, this could come at the cost of losing exposure to a sudden increase in value as well.

Another advantage to DAI is that it may remove transaction costs and delays that impair trade execution within the crypto market when using traditional government currencies, which may need to move between banks, delaying optimum execution.

DAI also offers users the ability to access loans in a way that may offer advantages over existing options. As opposed to a process in which their credit is evaluated by a bank or financial institution, DAI users can instead put up ether and receive DAI.

When they decide to pay the loans back, they pay an additional fee.

DAI is a type of cryptocurrency known as a stablecoin, which means its value is pegged to another asset, in this case, the US dollar. This makes DAI useful for a few reasons:

Stability: Unlike many other cryptocurrencies, DAI’s value doesn’t fluctuate wildly. This makes it a good option for people who want to use cryptocurrency for transactions without having to worry about the price going up or down significantly.
Hedging: Crypto traders can use DAI to hedge against the volatility of other cryptocurrencies. By converting their holdings to DAI, they can protect themselves from sudden price drops.
Loans: DAI can be used to get loans without going through a traditional bank. Users can lock up cryptocurrency as collateral and borrow DAI in exchange.
Payments: DAI can be used to make payments for goods and services online, similar to other cryptocurrencies. However, with the advantage of stable value.

Overall, DAI offers the benefits of cryptocurrency, like fast transactions and security, with the added advantage of price stability.

Why use DAI?

Users may be interested in buying DAI because it offers the efficiency and transparency benefits of cryptocurrency, but may also provide a convenient alternative place to hold funds whilst the user thinks other crypto assets may be more volatile

Further, like other cryptocurrencies, stablecoins are borderless, programmable and easy to transfer at low cost. This makes stablecoins a valuable alternative to traditional banking institutions.

Kraken users can quickly transfer DAI to their accounts and exchange DAI for other cryptocurrencies.

DAI is a stablecoin that is designed to maintain a value of $1.00, making it a reliable store of value in the volatile cryptocurrency market. Its stability is maintained through a system of smart contracts and collateralized debt positions, which help to keep its value pegged to the US dollar. DAI is also an ERC-20 token, which means it can be easily integrated with various decentralized applications (dApps) and wallets. This makes it a versatile and widely accepted form of digital currency. Some of the key benefits of using DAI include:

1. Stability: DAI’s value is designed to remain stable, making it a good choice for those looking for a reliable store of value or a medium of exchange.

2. Decentralization: DAI is a decentralized currency, which means it is not controlled by any central authority or government. This can make it a more attractive option for those who value privacy and decentralization.

3. Interoperability: DAI is an ERC-20 token, which means it can be easily integrated with various dApps and wallets. This makes it a versatile and widely accepted form of digital currency.

4. Accessibility: DAI can be easily purchased on various cryptocurrency exchanges, making it accessible to a wide range of users. Overall, DAI’s stability, decentralization, interoperability, and accessibility make it a popular choice for those looking for a reliable and versatile form of digital currency.

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