What is DAI?

DAI is a decentralized stablecoin that runs on the Ethereum blockchain and aims to keep its value as close as possible to one U.S. dollar (USD). Unlike other stablecoins that are directly backed by USD or other traditional assets held in a bank account, DAI is overcollateralized with a mix of other cryptocurrencies. Launched in December 2017 by MakerDAO, DAI is unique in that it is managed by a decentralized autonomous organization (DAO) and its value is stabilized through smart contracts and dynamic feedback systems rather than external manual intervention.

How is DAI useful?

DAI is primarily useful as a medium of exchange and a stable store of value, especially within the cryptocurrency ecosystem where volatility can be significant. Because DAI aims to maintain a stable value, it is ideal for transactions, savings, loans, and other financial applications where price stability is crucial. DAI is also an integral part of the decentralized finance (DeFi) space, where it can be used for lending, borrowing, and earning interest in a manner that reduces the risk associated with the typical volatility of cryptocurrencies.

How does DAI work?

DAI is created through a system of smart contracts on the Ethereum network that MakerDAO governs. Users can generate DAI by depositing collateral assets into Maker's Vault, which locks the assets and allows users to mint DAI against them. This process ensures that each DAI is backed by more value in collateral than the DAI itself, a mechanism designed to maintain its peg to USD even if some of the underlying collateral loses value.

The system uses a dynamic system of Stability Fees (interest rates) and Savings Rates to manage economic incentives and ensure the stability of DAI’s value. If the value of DAI drifts from $1, the system adjusts these rates to encourage users to either create more DAI or reduce the circulating supply, nudging its price back to the intended peg.

Major developments

• Multi-Collateral DAI: Originally, DAI was backed only by Ether (ETH). In November 2019, MakerDAO released Multi-Collateral DAI, which allowed DAI to be backed by multiple types of collateral, not just ETH. This diversification further secured the stability and robustness of DAI.

• DAI Savings Rate (DSR): This feature allows DAI holders to lock their DAI in a smart contract to earn savings automatically paid out from Stability Fees collected by the system. It provides an additional incentive for holding DAI and contributes to its stability.

• Integration with Other Blockchains: To increase its scalability and reduce transaction costs, DAI has been integrated into several other blockchains through bridges and wrapped tokens, expanding its usability across the cryptocurrency ecosystem.

• Governance Enhancements: As a DAO, Maker continues to evolve its governance processes, including voter incentives and delegation, to improve community involvement and protocol management.

• Risk Management Enhancements: Improved risk assessment mechanisms concerning the types of collateral backing DAI.

• DAI’s innovative approach to decentralized stablecoin design and its integral role in DeFi make it a cornerstone of the cryptocurrency landscape, offering a stable, scalable, and community-driven alternative to traditional finance.

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