DAI is a decentralised stablecoin that operates on the Ethereum blockchain and is designed to maintain a 1:1 value peg to the US Dollar (USD). Unlike traditional stablecoins, such as USDT or USDC, which are backed by reserves of fiat currency, DAI is created through an algorithmic process and is collateralised by other cryptocurrencies, primarily [...]

By Published On: December 5, 2024

DAI is a decentralised stablecoin that operates on the Ethereum blockchain and is designed to maintain a 1:1 value peg to the US Dollar (USD). Unlike traditional stablecoins, such as USDT or USDC, which are backed by reserves of fiat currency, DAI is created through an algorithmic process and is collateralised by other cryptocurrencies, primarily Ether (ETH), as well as other digital assets.

DAI is governed by the MakerDAO protocol, which uses a decentralised autonomous organisation (DAO) to manage the system, including adjusting collateral types and maintaining the stability of the coin.

Key Features of DAI:

  1. Stability: DAI is designed to keep its value as close to 1 USD, making it a stable asset in the volatile cryptocurrency market.
  2. Decentralised: Unlike many centralised stablecoins, DAI is governed by the MakerDAO community, which means decisions about the coin’s management are made by its users, rather than a central authority.
  3. Collateralisation: DAI is backed by digital assets locked in smart contracts, which ensures that the value remains stable and the system is secure.
  4. Collateralised Debt Positions (CDPs): To create DAI, users lock up collateral (like ETH) in a smart contract, generating DAI in return. If the value of the collateral falls below a certain threshold, the collateral is liquidated to ensure the stability of the coin.

How DAI Works:

  1. Creation: Users deposit collateral (ETH, BAT, etc.) into MakerDAO’s smart contracts to generate DAI.
  2. Stability Mechanism: DAI’s value is maintained through governance mechanisms and liquidation of collateral if the price deviates from its 1 USD target.
  3. Staking: Users can stake DAI in the MakerDAO ecosystem to earn rewards or participate in governance decisions.

Use Cases of DAI:

  • DeFi Applications: DAI is widely used in decentralised finance (DeFi) platforms for lending, borrowing, and yield farming.
  • Hedging Against Volatility: Investors use DAI as a stable store of value during times of high market volatility.
  • Cross-Border Transactions: DAI provides a stable alternative to traditional currencies for international transactions and remittances.
  • Collateral for Loans: DAI is used as collateral on lending platforms in the DeFi space.