DAI is an Ethereum-based stablecoin managed by the Maker Protocol and MakerDAO. Its value is soft-pegged to the U.S. dollar and backed by various cryptocurrencies deposited in smart-contract vaults. It's crucial to distinguish between Multi-Collateral DAI and the older Single-Collateral DAI (SAI). SAI, collateralized by a single cryptocurrency, doesn't support the DAI Savings Rate, which lets users earn savings on their DAI holdings.
History
MakerDAO was established in 2014 by Danish entrepreneur Rune Christensen. The name derives from the Chinese character 貸, meaning "to lend or to provide capital." DAI was launched on Ethereum's main network on December 18, 2017. Despite a significant decline in Ether's value, DAI's price remained stable around one US dollar during its first year.
In September 2018, Andreessen Horowitz (a16z), an American venture capital firm founded in 2009 by Marc Andreessen and Ben Horowitz, made a significant investment of $15 million, acquiring 6% of all MKR tokens. The Maker Foundation was created in 2018, based in Copenhagen, to support system projects, including essential code development.
In 2019, an internal debate arose about integrating with traditional finance, focusing on regulatory compliance and broader collateral acceptance, leading to the CTO's departure. In March 2020, at the pandemic's onset, DAI experienced volatility, trading at $1.11 for less than a day before stabilizing at its $1.00 target.
What is Unique about DAI?
DAI’s main advantage is that it is managed by a decentralized autonomous organization (DAO) rather than a private company. This system uses Ethereum-powered smart contracts to ensure transparent, publicly recorded issuance and burning of tokens, reducing the risk of corruption. Furthermore, DAI's development process is democratic, allowing regular participants in the token's ecosystem to vote directly on changes, promoting a more community-driven approach.
Another benefit of DAI is its stable value, maintained through a soft peg to the U.S. dollar. A soft peg is a strategy for maintaining a currency's value against a reserve currency through the use of an exchange rate mechanism. In the volatile crypto market, where even major coins like Bitcoin can fluctuate drastically, stable assets like DAI are appealing for traders seeking to mitigate risk. Stablecoins, such as DAI, are cryptocurrencies pegged to stable assets, typically fiat currencies like the USD. This stability provides a safe haven amid market volatility. Despite the challenges of algorithmic stablecoins, DAI has endured in the crypto space.
How it’s used
DAI is managed through a process involving overcollateralized loans via MakerDAO's smart contracts. Users can deposit accepted collateral, like Ether, to mint new DAI as a loan. The collateral's USD value compared to the borrowed DAI establishes the loan's "collateralization ratio," monitored using decentralized oracles. If this ratio falls below a set minimum (usually 110-200%), collateral can be sold on a decentralized exchange to cover the debt.
When the loan and interest are repaid, the DAI is destroyed, and the collateral is released for withdrawal. This ensures DAI's value is backed by the USD value of the collateral held in MakerDAO's contracts. MakerDAO adjusts accepted collateral types, collateralization ratios, and interest rates to control DAI's supply and maintain its value. Examples of crypto collateral that have been accepted by MakerDAO include USDC, WBTC, ETH, MKR and many more.
Holders of the MKR token can propose and vote on changes to the MakerDAO system, with voting power proportional to their token holdings. Interest from loans is used to buy and burn MKR tokens, reducing their circulation and aiming for a deflationary effect linked to DAI lending revenues. If you have DAI or MKR on Ethereum, to get it on another network you would have to bridge. This article explains what it means to bridge your tokens and our L2 for Beginners article explains more about layer 2 networks.
You can buy, hold, and bridge USDC in the MEW Mobile app if you prefer using mobile, or by downloading the Enkrypt browser extension if you prefer using a web browser.
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