The cryptocurrency market is volatile, and your favorite coin’s price may have increased or decreased by the time you finish reading this article. However, some coins are designed to withstand fluctuation and remain at $1. These coins are referred to as stablecoins since they are to maintain the dollar peg without the interference of any entity.
This Dai review will cover the basics of the stablecoin—DAI, how it keeps the peg, and where to store DAI tokens.
What Is Dai?
Dai is a stablecoin, meaning its value is tied to that of a fiat currency like the USD. A stablecoin must be backed by some type of collateral to guarantee its stability. In the case of Dai, it is backed by collateralized crypto debt maintained on a decentralized ledger through smart contracts.
Dai is an ideal asset for lending and borrowing because it is a stablecoin. When used for lending, it earns compounding interest at a higher rate than regular deposits. It is a concept that has swiftly emerged to allow familiar and traditional finance instruments to enter the crypto space.
Brief History of Dai
Dai was launched in 2017 and was developed by the same team who created Maker, the MakerDao. MakerDao is a decentralized autonomous organization built on the Ethereum network. Maker — ticker MKR is the native cryptocurrency of the MakerDao network. MKR holders are in charge of the risk management of the ecosystem. They can make important decisions related to DAI issuance, risk parameters, target rates, global settlement decisions, etc. The network issued 2 tokens — DAI and MKR — both are ERC-20 tokens.
Maker Protocol is trying to develop a line of Decentralized stablecoin that will be tied to other assets. So, they created a decentralized stablecoin backed by other assets. This allows the ratio of DAI to USD to stay at 1:1.
Reasons Why Crypto Traders Transact With Dai?
Why would someone want DAI or other stablecoins when fiat currencies are available? There are several reasons for this choice, which are as follows:
- Borderless: means that people can hold Dai regardless of where they are or whether they have a bank account. It also allows people to secure their resources, which is especially useful if they live in a hyperinflationary economy 1.
- Programmable: It is controlled by codes, allowing great flexibility. *Easy to Transfer. Dai may be sent cheaply anywhere in the world. Unlike international bank wire transfers, which require several business days and charge high costs. Since the blockchain powers it, these transfers can occur at any time of day, without breaks.
- Decentralized: The token does not require the intervention of a third party to govern your funds.
- Transparent: The coin is transparent because it is open source. Anyone can download, inspect, and use the Dai code. The Dai generation system is open to the public and auditable.
- Collateralized: It is backed by other crypto assets. For each Dai? Numerous cryptocurrencies back it up in a smart contract, which gives the coin its worth.
How does this work? How does Dai stay stable?
Unlike traditional stablecoins like USDC, where each token is issued from a deposit of dollars held in a company’s treasury, Dai cryptocurrency mechanism involves the concept of loans with guarantees.
For instance, if you take out a loan from traditional banks, you need to put in some collateral (landed property, building, vehicle, and so on.) These can be seized and used to repay the loan in the case of default. The bank also charges interest on the loan accumulated at a given period. Dai works the same way: where you can borrow dollars providing a guarantee and paying a stability fee. These dollars are issued through the Dai token, and the guarantee is made using various crypto assets: ETH, COMP, BAT, USDC, etc.
The minimum collateral ratio depends on the token used as a guarantee. The ratio is usually 150% of the value of the debt. The reason is that cryptocurrencies are volatile, and the value may fluctuate badly.
Dai can be borrowed on Oasis Borrow. It enables users to borrow Dai tokens using guarantees supported by Maker Protocol.
The collateral is deposited and managed in a vault through the use of a decentralized smart contract. The vault is locked and can only be opened when the borrowed Dai and stability fee is returned.
In order to get your locked collateral back, you need to return Dai and then pay a stability fee. So, what is a stability fee? Think of the fee as the interest on typical loans from banks. The stability fee depends on the collateral being locked. The returned Dai is then burnt.
Liquidation and Auction
In the case of default or if the value locked in the vault falls below the debt borrowed, the collateral is liquidated. An auction takes place for each liquidation where interested users (keepers) offer to buy the amount of the locked collateral. The highest bidder gets to pay for the value of the liquidated collateral with Dai tokens.
Maker uses the Oracle feed, which shows real-time information about the market price of the collateral assets in the vaults to know when to liquidate.
Some of the Cryptocurrencies Used as Collateral
The DAI is an asset-backed token. Here are some of the tokens used as collateral in no particular order.
ETH: Ethereum network’s native cryptocurrency and the most commonly used type of collateral for generating Dai.
BAT: The Brave browser project’s reward token.
USDC: A stablecoin backed by US Dollar reserves held by licensed financial institutions.
wBTC: Wrapped Bitcoin, a cryptocurrency backed 1:1 by BTC, held in the custody of BitGo.
MANA: Decentraland’s native token, a blockchain-based game.
COMP: The governance token for the Compound.Finance lending protocol.
LINK: Chainlink’s decentralized oracle network payment token.
GUSD: A regulated stablecoin backed by US dollars and issued by Gemini Trust Company.
UNI: The governance token for Uniswap, a decentralized exchange.
MATIC: The Polygon Network’s native token.
All of these listed coins and tokens are available for transactions on the Guarda platform.
Where to Store Dai Token
Given the DAI stablecoin uses the ERC-20 token standards, you can store and exchange it like most Ethereum-based tokens on Guarda. The token can also be exchanged or purchased on the platform. In addition, the coin is available for transactions on web/desktop and mobile. All you need to do is create an account on Guarda, add the DAI wallet to your list and download the backup.
Due to its decentralized features, it is one of the most famous stablecoins in the crypto market. The coin has stayed close to the value of USD since its creation in 2017. It is the 4th best DeFi stablecoin on Guarda in terms of Stablecoin.
Hyperinflation is defined as an economy’s rapid and uncontrolled price increases, generally at rates greater than 50% per month over time. In times of war and economic turbulence in the underlying manufacturing economy, along with a country’s central bank printing so much money, hyperinflation can arise. When the government prints so much money, the currency’s value decreases radically. ↩