DAI is a stablecoin that is pegged against the US dollar. Stablecoins are crypto coins pegged to a stable asset like gold or the US dollar. Stablecoins aim to reduce volatility relative to unpegged crypto coins like BTC and ETH. The MakerDAO protocol introduced the DAI token, which operates on the Ethereum blockchain. DAI is a decentralized stablecoin that aims to keep its value close to or equal to $1.
High volatility is one of the major issues hindering the wide adoption of crypto. Users are sceptical about paying with a digital asset that either loses value quickly or has the potential to double in value quickly. This issue has led to the emergence of stablecoins like DAI. The whitepaper of MakerDAO says it aims to solve these issues and bring stability to the crypto market. It also states that stablecoins are essential for any organization to realize the benefits of digital currency.
Stablecoins such as the DAI token aim to offer inherent benefits like instant transfer, low fees, secured transactions, and quick settlements. They aim to provide stability during volatile times in the crypto market. These crypto coins can be used as a reliable digital currency for global transactions. MakerDAO employs game theory to maintain the stable value of $1. The Maker protocol balances the economic incentives to constantly keep the value of DAI close to $1.
How does DAI work?
DAI crypto is collateralized by other crypto coins. If a crypto user wants to buy DAI, they can either spend ETH to buy the dollar equivalent amount in DAI on a crypto exchange or collateralize ETH and other crypto assets through the Maker Protocol.
Collateralized debt positions (CDPs)
Based on the Maker protocol, CDPs are Smart contracts that crypto users can leverage to lock their collateral crypto assets to generate DAI tokens. DAI is usually overcollateralized to account for the volatility of the crypto collateral.
DAI example
Obtaining DAI tokens is similar to getting a loan from a bank. Users must acquire enough ETH as DAI tokens are collateralized by crypto coins. This collateralized amount is then deposited on the platform, and in return, DAI tokens are issued as a loan. Users can return an equal amount of DAI crypto to retrieve their collateral.
What is DAI Backed By?
DAI is a well-known stablecoin pegged to the US dollar, like many stablecoins in the crypto space. However, DAI has a unique method to maintain its peg by using other crypto assets as collateral. A set of crypto is automatically managed through smart contracts to ensure the value of DAI is close to or equal to $1.
DAI Benefits
No Volatility
DAI, being a stablecoin, experiences low volatility, and its value stays close to $1. As a result, DAI crypto offers an excellent option for payments.
Decentralized
DAI is governed by the MakerDAO, which is decentralized and governed entirely by its community. There is no single authority or entity that can control the functioning of DAI, and its future is decided by its stakeholders.
Secure and audited
This stablecoin ecosystem is secure due to its decentralization, regular audits, and cryptographic safety. Trusted third parties conduct regular audits to validate that the required crypto tokens are maintained as collateral. These audit reports are available to the public for verification.
Fast and efficient
DAI can be used for cross-border transactions. International transactions can take 2–4 days and cost big money through traditional payment systems. DAI can complete cross-border transactions in a few seconds with low costs.
How safe is DAI?
MakerDAO is known to conduct regular audits to ensure robust safety on the platform. Developers use mathematical analysis to verify all smart contracts and the underlying protocols that make up the internal structure of this system.
Why use DAI?
Users can get a loan from DAI without intermediaries, as it deploys Smart contracts. DAI interest rates are comparatively lower than those of other protocols. On the lender’s side, no intermediary is taking a cut from the interest amount. Thus, every party involved benefits from taking loans using DAI.
Does DAI have a future?
Since its inception, DAI has been influential in the DeFi space. DAI solves a big problem that plagues other cryptos: volatility. DAI will remain relevant as long as other crypto coins experience volatile pricing.
Conclusion
Since its launch in 2017, MakerDAO has made DAI a competitive stablecoin in the crypto market. MakerDAO must focus on its branding and marketing and educate users about its benefits if they want to use this crypto token. The DAI token is expected to play a vital role in the DeFi space. DAI has become a popular tool for users to trade and pay securely. It has a unique collateral system, and its stable pricing makes it an attractive option for crypto users.
Visit ZebPay blogs and stay up to date with all the latest crypto news. You can now trade more than 100+ cryptos on ZebPay.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Each investor must do his/her own research or seek independent advice if necessary before initiating any transactions in crypto products and NFTs. The views, thoughts, and opinions expressed in the article belong solely to the author, and not to ZebPay or the author’s employer or other groups or individuals. ZebPay shall not be held liable for any acts or omissions, or losses incurred by the investors. ZebPay has not received any compensation in cash or kind for the above article and the article is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.
