One of the first stablecoins to come into existence, Dai was launched in 2017 and is maintained and regulated by MakerDAO. Using a series of smart contracts, Dai maintains a value of $1, or very close to it. Due to the coin’s soft peg to the US dollar, the Dai stablecoin not only provides a stable long-term store of value but also a strong medium of exchange.
Let’s explore what Dai is and how it contributes to the crypto ecosystem.
What are Dai tokens?
Dai is an ERC-20-based stablecoin pegged to the US dollar. While more stablecoins hold the fiat currency to which they are pegged in reserves, the Dai stablecoin instead uses several cryptocurrencies to ensure it holds its peg.
Supported cryptocurrencies include Ethereum (ETH), Basic Attention Token (BAT), USD Coin (USDC), Wrapped Bitcoin (wBTC), Compound (COMP), and many more. With a wide range of collateralised cryptocurrencies, user risk is decreased and Dai's price stability is increased.
Dai is issued and operated by the Maker Protocol and the MakerDAO (decentralised autonomous organisation). Designed to provide a means of lending and borrowing crypto assets, the Dai stablecoin was at the forefront of the DeFi revolution. Holders of Dai can also earn interest.
The platform has another coin, MKR, which allows holders to set the Dai Savings Rate (DSR) and act as guarantors for Dai. This ensures that MKR tokens can be liquidated if the system fails. This structure motivates guarantors to ensure that the Dai system and its collateralised coins operate properly.
How do you generate Dai?
Users can generate Dai by paying collateral assets. Dai is created when users deposit ETH or any supported cryptocurrency as collateral. The equivalent amount of Dai is then issued and the user will receive Dai tokens.
If the Dai holders want the collateral assets back, the borrowed Dai can be paid back (plus a stability fee) and the collateral assets will be released. This Dai coins are then removed from circulation.
History of the Dai stablecoin
The MakerDAO was first launched in 2015 by Rune Christensen and is the longest-running protocol on the Ethereum blockchain to date. It holds more than 2.3 million ETH in its protocol, approximately 2% of Ethereum’s total supply.
When first created, only ETH could be used as collateral, however, in 2019 more cryptocurrencies were added to this list. The Dai price has always been soft pegged to the US dollar.
How does DAI work?
The Dai cryptocurrency is an ERC-20 token that can be bought on both centralised and decentralised exchanges (DEXs). Users can also generate and borrow Dai by using MakerDAO's Oasis Borrow dashboard to establish a Maker collateral vault and put Ethereum-based assets in as collateral.
In its original use, the Maker protocol stored collateral in smart contracts known as maker collateral vaults. These smart contracts held collateral in escrow until the borrowed Dai was repaid, also known as collateralised debt positions (CDPs). The value of the security you send always exceeds the amount of DAI you receive otherwise the collateral will be liquidated.
The Dai platform is one of the most integrated digital assets in the blockchain industry and can be utilized across decentralised finance (DeFi) applications and blockchain-based games, among other places.
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