Learn more about the actually stable algorithmic stablecoin DAI in our “What Is DAI?” guide.
COVERED:
- What is DAI?
- Who Created It?
- How It Works?
- What is DAI Token?
- Concerns
WHAT IS DAI?
DAI is an ERC-20 token on the Ethereum blockchain. It is a stablecoin pegged 1:1 to the value of the U.S dollar. It attempts to maintain its value with the US dollar by locking other crypto assets in contracts. DAI is the product of open-source software called the Maker Protocol which is a decentralized application running on top of the Ethereum blockchain. Unlike other cryptocurrencies which are backed directly by the US dollar, DAI is tied to the cryptocurrency collateral. This means that DAI stablecoins are produced via its Maker Protocol platform that accepts various cryptocurrencies as collateral. DAI can also be bought directly using fiat money (such as the US dollar) on certain crypto exchanges.
If users wish to acquire DAI, they can spend ETH to purchase the dollar equivalent amount in the stablecoin on any exchange, or they can also collateralize ETH and other assets using its Maker protocol. DAI is also widely used within the decentralized finance (DeFi) ecosystem which makes it a useful stablecoin, as it reduces volatility by enabling several DeFi features such as lending, borrowing, or trading.
WHO CREATED IT?
The DAI was officially launched on the Maker Protocol in December 2017 as a means to provide a non-volatile lending asset for businesses and individuals. The Maker protocol was founded by Maker Foundation which was created in 2014 by Rune Christensen. The Maker Foundation soon gave up control of the protocol to MakerDAO which is a decentralized autonomous organization(DAP) and it now governs the Maker Protocol.
The main aim behind the creation of DAI was its transparency and auditability. DAI is primarily collateralized by Ether which is strictly verified on the Ethereum blockchain. Furthermore, it is governed by smart contracts and hence, it cannot be seized or censored by any government or regulatory authorities.
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HOW IT WORKS?
DAI works on the Maker Protocol which allows almost anyone in the world to produce the stablecoin using a variety of cryptocurrencies as collateral. This protocol is an open-source project which has the goal to operate a credit system that would allow users to take out loans collateralized by cryptocurrencies. These loans provide a way for a lender to secure a loan using crypto-based assets that they own. They also have a lower interest rate than unsecured loans because they allow lenders to seize the asset and sell it in case the borrowers are unable to pay the loans.
Likewise, DAI maintains its value by using collateralized debt in the form of ETH. The Maker protocol works through smart contracts in the form of collateralized debts which are running on Ethereum and enables borrowers to lock ETH and other crypto assets thus collateralizing them in order to generate new DAI tokens in the form of loans. When a loan is taken out on MarkerDAO, DAI is created. Once DAI is created. It works simply as a stable ERC-20 token. Similarly, DAI is destroyed when the loans are paid back. If the borrower wishes to recover the locked ETH, he will have to return the DAI to the protocol and pay a fee. In this way, the Marker protocol will take the collateral and sell it using an internal market-based auction mechanism.
The smart contracts also keep in check the price of DAI and they automatically execute themselves. If the price of DAI fluctuates too far from $1, Maker (MKR) tokens (an Ethereum token) are burned or created in order to stabilize the price of DAI. To date, DAI has remained stable for over three years with only minor fluctuations from its $1 price peg.
In conclusion, DAI is simply a token on Ethereum, which anybody can use without permission. As an ERC-20 token DAI functions as a building block that can be incorporated into any decentralized application needing a stable asset or payment system and is easily transferrable between Ethereum wallets.
WHAT IS DAI TOKEN?
DAI is the native stablecoin of the MakerDAO. It is pegged 1:1 to the US dollar and it is the currency users borrow and payback on the Maker Protocol. It is easily transferable, transparent, and secure as its insurance on the Ethereum blockchain proves it. As an ERC-20 token, it can be stored in personal hardware wallets where users maintain ownership over the private keys. A transaction with DAI does not require any account creation or KYC processes. It is by far the most private stablecoin available.
DAI has a market cap of more than $6 billion. It is ranked as the 17th largest cryptocurrency in terms of marketcap on Coingecko. DAI offers traders a powerful tool for avoiding the extreme volatility of many cryptocurrencies whose prices are determined by the open market.
CONCERNS
The stablecoin space is one in which new stablecoins are popping up fast. This is leading to a lot of competition among all the new and old stablecoins in the market. Currently, DAI is the 4th largest stablecoin in terms of marketcap, behind the likes of USDT, USDC, and BUSD respectively. Although DAI is a growing stablecoin, it has got certain loopholes that can potentially become a problem in the long run. One of these problems is that it is only listed on a few major exchanges and does not have nearly as many trading pairs compared to other centralized stablecoins such as USDT or USDC.
Similarly, another concern is that It is collateralized by Ethereum which is in itself a volatile asset. It means that there is a much greater risk for holders of algorithmic-based stablecoin versus centralized stablecoins that are collateralized by fiat. It is also exposed to greater USD price fluctuations compared to centralized stablecoins due to being collateralized primarily by Ethereum.
Where To Buy?
You can purchase DAI through KuCoin exchange, similar to how you would buy another cryptocurrency. You can either place a market buy or a limit buy. With a limit buy, you determine the price you are willing to pay, and your order gets filled once the token price reaches your limit price. If you want to get your hands on the token quickly, you can place a market order, where you agree to pay the current price and have your order filled almost immediately. If you are interested in purchasing DAI, you can do so by visiting KuCoin, Gate.io, or Binance.US.
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