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What is DAI?

September 8, 2020

Veterans of the cryptocurrency space are no strangers to DAI – a decentralised stablecoin cryptocurrency that is soft pegged to the US Dollar at a 1:1 ratio.

DAI was created by one of the first decentralised protocols on the market – the MakerDAO project (MKR), which has been in development since 2014. The intention of the project is to offer a solution to high volatility faced by cryptocurrencies while still maintaining the ease of accessibility that has become a staple in the crypto industry.

Similar to USDC, DAI is a stablecoin that is pegged to the Dollar, with an exchange rate that replicates US Dollar valuations against other fiat currencies. Unlike other stablecoins that are directly backed by USD, DAI is backed by cryptocurrency collaterals that can publicly be seen on the Ethereum blockchain.

DAI in brief

  • DAI is a USD-pegged decentralised stablecoin built on Ethereum
  • The decentralised coin was created by MakerDAO (MKR)
  • One Dai is worth ~$1 until it is taken out of circulation
  • Dai can be traded freely as any other ERC-20 token
  • Anyone with an Ethereum wallet can send DAI to another ETH wallet

DAI in detail

Contrary to central banks, Dai maintains its stability without any centralised trust in institutions. Instead, it is managed by a decentralized community of people who vote on system parameters. Anybody who holds the Maker governance token (MKR) can participate in the management of the system.

The process is helped by the Maker platform smart contracts and several other mechanisms that allow the stablecoin shift and adjust according  to market changes in order to maintain its 1:1 ratio with the US Dollar. Unlike other stablecoins, Maker does not require a centralised controller to oversee collateralisation. Nor is there any need for traditional banks or other institutions to make sure things remain functional. Since the cryptocurrency lives on the Ethereum blockchain it makes use of smart contract technology in order to maintain relative decentralisation that cannot be shut down or censored.

DAI can be exchanged without ever interacting with a middleman, provided the two parties in question both own an ERC-20 compatible crypto wallet. Whether you’re from Sweden, the United States or the Philippines, exchanging DAI only requires that you own an Ethereum wallet. As such, it is borderless technology that mimics the spirit of other cryptocurrencies such as bitcoin and Litecoin.

What can you do with DAI?

One of the main uses for DAI is as a stable hedge or counterbalance against volatility of more popular cryptos such like Bitcoin and Ethereum. The stable value of DAI means it is good for investors or traders who are anticipating market volatility. Since DAI is stable, it’s also one of the most ideal cryptos to spend.

How do you get hold of DAI tokens?

You can buy, sell, trade and exchange DAI on MakerDAO’s Oasis platform or for ease of access, on the SwissBorg Wealth App.

What are MakerDao and MKR?

MakerDAO is a decentralized organization dedicated to bringing financial stability and transparency to the world economy. The project is built on the Ethereum blockchain. The Maker project is comprised of two distinct tokens. Dai, the decentralized stablecoin and MKR, which is the governance token that enables decentralized governance. Both are issued on Ethereum as per the ERC-20 standard.

A primary objective of the project is to create stable decentralised digital assets that are tied to various forms of collateral such as gold, fiat currencies and other real-world instruments. The team is highly reputable and has also been backed by Vitalik Buterin.

The decentralised aspect comes into play with the MKR token, which allows holders of the coin to vote on important decisions related to the platform such as DAI issuance, defining risk parameters, target rates, price feed sensitivities as well as global settlement decisions.

For example, if one were to take a loan in Dai, the Maker coin would be used to pay the “stability fee”. All the while, MKR coins cannot be mined and are taken out of circulation (or burned) during the settlement process.

Balancing incentives

The idea of having these several moving parts is to implement a functioning game theory in order to carefully balance economic incentives, which in unison work to maintain Dai’s stable value of $1.

In fact, when a single Dai falls below a dollar, the incentive mechanisms kick in to retain the $1 stability. In addition, Dai coins are always over-collateralised, which means that coins are not just backed by a 1:1 ratio with the underlying asset (such as Ether), but are instead backed by a surplus collateralisation ratio. This means that if one Ether is worth $100, and the collateralisation ratio is 150%, then you could create 66 Dai.

Putting it all together

Ultimately, DAI is the crypto community’s answer to the market need for a stablecoin that takes the best from fiat currency while implementing censorship-resistant features at the same time. Thus far, the decentralised stablecoin has arguably managed to maintain its mission statement as it clings on to the number 3 position in terms of stablecoin-market cap – valued at $450 million at the time of writing.

Invest in DAI on the SwissBorg Wealth App and automatically find the best price available across the biggest crypto exchanges

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