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What is the Stablecoin DAI?

DAI is a stablecoin that’s popular in the DeFi community. Learn more about the novel way of maintaining stable value in volatile times. 

Cryptocurrency, as you’re probably aware, is yet to be fully accepted by the general public. Arguably the biggest factor holding it back is its volatility. If you’ve seen a Bitcoin value graph for the past few years, it looks like a magnitude 5 earthquake on the Richter scale.

Bitcoin price index 2013-2020 | Source: Coindesk

Stablecoins or crypto dollars is a newer concept of cryptocurrencies. They aim to be steady in value and could pave the way toward mainstream acceptance of cryptocurrency. Dai is one of the most popular stablecoins in the DeFi community.

What is DAI?

Dai – or the stablecoin Dai – is a cryptocurrency that’s decentralized, unbiased, and backed by collateral. It’s “soft-pegged” to the U.S. Dollar, meaning it aims to match the dollar in value at any given time. Dai is issued on the Ethereum blockchain. Think of blockchain in this context as a payment network. 

DAI could work like regular money

Dai has similar properties to everyday cash currency:

  • Dai is a store of value: In finance, a store of value is an asset that remains steady in value without much depreciation over time. Dai is designed to function as a store of value, meaning it remains stable in value even in a volatile market.

  • Dai can be exchanged: You can trade Dai as you do money. You can sell, purchase, or trade for goods and services. It’s accepted in crypto and DeFi communities worldwide but does not have mass adoption yet. 

  • Dai is a unit of account: Like the U.S. Dollar, Dai is considered a standard unit of measurement within the cryptocurrency ecosystem. While Dai is soft-pegged to the dollar, in reality, it moves between $0.96 and $1.07, as you see in the chart further down.

The Maker Protocol governs DAI

Dai as a concept was introduced by the creators of MakerDAO, which is an open-source project on Ethereum. It’s a Decentralized Autonomous Organization (DAO) that’s been around since 2014. They run the Maker Protocol – a decentralized application – on the Ethereum blockchain.

The Maker Protocol allows anyone to create Dai by collateralizing it with digital assets. The other elements of the system are Governance, Vaults, Oracles, and Liquidators. We won’t get into these concepts in detail, but essentially, Dai is created when you deposit collateral in the form of digital assets to a Vault and pay a stability fee.

The Maker protocol has an MKR governance token that allows votes on monetary policies and changes to the protocol to ensure the health of the system. Examples of governance decisions are: accepted collateral type, stability fees, and debt ceiling for a particular asset. MKR token holders are spread out all over the world. 

DAI can be generated, bought, or received

How do you get Dai of your own? You can generate Dai by depositing approved digital assets into Maker Vaults. You can buy Dai from an exchange or use a wallet like Linen App to get it (coming soon). Finally, you can accept Dai as a means of payment.

DAI is backed by excess collateral  

Dai is a type of over-collateralized stablecoin. That means for every Dai in existence, there’s collateral in excess of the value locked away in a Maker Vault. The excess value acts as a cushion against market volatility. Collateral is monitored in real-time by the Maker Protocol. Should collateral value drop below the minimum ratio, the collateral in a Vault gets liquidated with a 13% penalty. This penalty incentivises Vault holders to keep collateral above the minimum threshold. 

What kind of collateral is supported or allowed into a Vault? As of today, four assets are supported: ETH, Ethereum’s native currency; BAT, a digital asset issued on the Ethereum blockchain; WBTC (wrapped Bitcoin), a representation of Bitcoin on the Ethereum blockchain; and USDC, a U.S. dollar-backed stablecoin. 

Why DAI is a game-changer

Cryptocurrency makes many promises but can’t always deliver because of its volatility. Dai is much more dependable, however:

1. Dai aims to be worth exactly 1 U.S. Dollar

Dai was designed to be stable. Unlike regular cryptocurrency, the value of a single Dai hovers around 1 U.S. Dollar. In other words, it’s much more reliable than traditional crypto. Take a look at the chart below for its value history and note how the graph is exceptionally steady:   

DAI price 2018-2020 | Source: Messari

2. It allows anyone in any country to mint a coin that tracks the U.S. Dollar

Anyone in the world can lock supported digital assets in the Maker Vault and mint a USD-pegged Dai coin. This is priceless in countries with an unstable currency or no easy access to U.S. dollars.

You can use supported collateral to create Dai at any time. It’s like borrowing against your car or your house when you need it. Interest rates (stability fees) on your borrowings have ranged from 0-19% APY in the past and depend on market conditions.

3. No government or authority can shut it down

Dai is truly independent. It’s completely decentralized, meaning no government or authority can shut it down. The Denmark-based Dai Foundation houses MakerDAO’s material assets like trademarks and copyrights.

Linen App will allow you to earn interest on your DAI

Linen App members will be able to access Dai soon. You can use Linen App to buy Dai and deposit it to the Compound Pool to earn interest. If you already own Dai, you can deposit it to Compound directly via our app. 

DAI is going places

Dai supply was growing at an average rate of 27% per month at the end of 2019. Dai user-activity has more than quadrupled, with over 43,000 new people joining the Maker Protocol in August alone. 

Dai is one of the most important projects in the DeFi ecosystem. It is doing great and has a bright future ahead.