All You Need To Know About Dai (DAI) Stablecoin
Dai is the Ethereum backed, decentralized cryptocurrency that is stabilized against the value of the US dollar. A creation of the Maker’s (MKR) Dai stablecoin System, Dai responds to fluctuating market conditions and maintains its value against the major world currencies through margin trading. Dai is different from other popular stablecoins backed by the USD in that it is backed by publicly accessible crypto collaterals on the Ethereum blockchain.
What Is DAI?
To put it simply, Dai is a decentralized stablecoin from MakerDAO (MKR). One Dai is equivalent to 1 US dollar (at a 1:1 ratio) and will remain so until the token is no longer in circulation.
The way Dai maintains its stable value with no centralized trust is quite interesting. It moves according to market changes which enables it to keep a steady price against other cryptocurrencies. Maker facilitates this process, which also includes CDP smart contracts, MKR tokens, and many other mechanisms to achieve stabilization. A centralized authority overseeing flat-collateralized stablecoins such as Tether (USDT) is not needed, as well as traditional banks backing it. Based entirely on the Ethereum blockchain and its smart contracts, Dai is a truly trustless, decentralized stablecoin that can never be shut down or censored.
To summarize, there are different benefits with this project, which include:
- 1 Dai is equivalent to $1.
- It cannot be shut down by the government or any other centralized authority.
- It cannot be controlled by an individual or entity.
- It can be exchanged by bypassing all the middlemen, much like other cryptocurrencies.
- Like any ERC-20 token, it can be freely traded.
- The volatile cryptocurrency ecosystem is transformed by its trusted stability.
- It can be sent and received by anyone with an Ethereum wallet and from anywhere in the world.
Dai Is An Asset-Backed, “Hard Currency”
As a result of price fluctuations, many consumers and merchants do not see cryptocurrencies as a reliable method of payment. However, stablecoins like Dai enable investors to hold value in more assets that are price-stable.
Dai is an essential part of the Maker’s permissionless credit system developed by Ethereum, the largest smart contract platform in the world. Because it is always backed by some type of valuable asset, Dai Stablecoin is described as an asset-backed “hard currency”.
A Brief Look At Stablecoins
Stablecoins are cryptocurrencies with their value pegged to assets such as fiat currencies, collaterals, other cryptos, precious metals or oil which are less volatile. Some stablecoin projects try to use algorithms to fix a steady value. Clearly, the idea behind stablecoins is to produce a cryptocurrency asset that is not prone to extreme volatility. Along with Dai (DAI), other popular stablecoins include Tether (USDT), Paxos Standard Token (PAX), USD Coin (USDC), Gemini Dollar (GUSD), TrueUSD (TUSD) and others.
Stablecoins are very crucial to the functioning of the cryptocurrency ecosystem. They allow you to do the following; : maintain a stable and lasting store of value in times when the market is volatile, make fast and easy global remittances and payments, send uncensored transactions to anyone with a wallet and internet connection as well as send large amounts of money at lower fees.
Differences Between Stablecoins
Four types of stablecoins exist and they are:
- Fiat-collateralized: These type of stablecoins are the most popular and almost all of them run in conjunction with a centralized institution. Examples include Tether (USDT), USD Coin (USDC) and TrueUSD (TUSD)
- Crypto-collateralized: These stablecoins are not dependent on traditional financial infrastructure and use crypto assets as collateral. By design, they are complex, less centralized and transparent. Examples are Maker (MKR), Dai (DAI), Bitshares (BTS) BitUSD, Havven (HAV) & nUSD.
- Algorithmic non-collateralized: These stablecoins use software-based economic models to attain stability. They are decentralized, complex and highly risky, since they need to continually grow to maintain balance. Examples of this are Kowala, Basis, Carbon, Fragments.
- Hybrid stablecoins. These are stablecoins which are a hybrid of the approaches used by the other coins. Examples include Reserve, Saga, Aurora — Boreal.
How DAI Maintain Its Value?
To continuously sustain the value of $1, Dai uses game theory and carefully balanced economic incentives. Once a single Dai falls below $1, users are incentivized to increase the price. When Dai rises above $1, the incentives work the other way. Rational actors can make money in any of these occasions as a result of the price swings. The further and further Dai deviates from the mean, the better is the incentives to fetch the price back to $1.
Furthermore, Dai coins are over-collateralized. What this means is that rather than backing coins 1:1 with underlying assets (usually Ether), the ratio is always greater than 1:1. For instance, if the worth of Ether is $100 with the collateralization ration is at 150%, 66 Dai can be created. This is all as a result of trading margin with collateralized debt positions (CDP) in Ethereum.
How Is Dai Created?
Dai is a stablecoin collateralized with Ether, this enables Ether holders to create Dai through the MakerDAO DApp.
To do this, you will first have to send Ether to a collateralized debt position (CDP).You will in turn receive a portion of Dai. A CDP is a smart contract running on the blockchain, and governing Dai issuance and redemption. After receiving Dai for ETH, it is important to repay the borrowed Dai if you wish to get your Ether back.
You can see that Dai is basically a loan taken against Ethereum. ETH users can, through MakerDAO, request for Dai loans. To start the process, user ETH holdings have to be turned to WETH (Wrapped Ethereum), an ERC-20 token. In doing this, WETH becomes part of the Ethereum pool, which becomes collateral for all issued Dai tokens. Another pool called PETH (Pooled ETH) is locked to create a collateralized debt position (CDP), with users receiving Dai tokens to use freely.
When Dai is created, the CPD ration continues to increase until it reaches a limit and there is no more Dai to withdraw against CPD.
Although this explanation of the mechanism behind Dai seems too simplistic, 99% of Dai users will not have to go through the complexities of issuing Dai and can buy it easily on an exchange.
Where Can Dai Be Bought?
Dai can be traded in the following exchanges:
Atomars: (In pairs with BTC, ETH, USDT and TUSD).
HitBTC: (In pairs with BTC, ETH, TUSD, USDT, EURS, XRP, LTC and more).
Coinhub: (In pairs with BTC, ETH, LTC).
Bitfinex, Ethfinex: (In pairs with USD, BTC, ETH).
Coinsuper, Kyber Network: (In pairs with ETH).
Bancor: (In pairs with BNT).
Radar Relay: (In pairs with WETH, MKR, ZRX, OMG, REP).
Exmo: (In pairs with USD, RUB, BTC, ETH, MKR).
Gate.io: (In pairs with USDT).