DAI is the first Ethereum-based, Collateral-backed cryptocurrency that is designed to maintain a one-to-one ratio with the U.S Dollar. It’s created and regulated by Maker DAO. It’s one of the largest stablecoins in terms of market cap.
What is a Stablecoin?
A stablecoin is a digital asset that is pegged to the value of a fiat currency. These coins are usually backed by organizations that hold an equal amount of fiat currency as collateral. For example, if an organization is issuing 10,000 stablecoins pegged to the U.S Dollar, they need to hold 10,000 U.S Dollars in the reserve that can be used as collateral.
Some organizations also hold other assets that are equal to the value of the fiat currency that the stablecoin is pegged to.
Fiat-backed Stablecoins – These coins are backed by fiat currencies like USD, GBP, and EUR. The value of a stablecoin is equal to the fiat currency it is pegged to.
Commodity Backed Stablecoin – Some organizations hold commodities like gold instead of fiat currencies. In this case, the value of the stablecoin is equal to one unit of that commodity (i.e. one ounce of gold).
Non-collateralized Stablecoins – The value of non-collateralized stablecoins is maintained with the help of smart contracts. The smart contract maintains a balance between supply and demand to establish the value of the stablecoin.
Crypto-backed Stablecoins – Unlike other stablecoins, crypto-backed stablecoins have a 1:2 ratio instead of a 1:1 ratio. These coins use reputable cryptocurrencies like Bitcoin and Ethereum as Collateral. DAI is one of the most popular crypto-backed stablecoins that is built on the Ethereum Network. It’s pegged to the U.S Dollar.
What is DAI Coin?
DAI is an Ethereum-based stablecoin that is pegged to the U.S Dollar. DAI coin is based on open-source software that enables cryptocurrency holders to borrow and lend money by locking their crypto assets. DAI coin is collateralized by a number of cryptocurrencies and its value is indirectly pegged to the U.S Dollar.
DAi plays an essential role in absorbing the volatility of cryptocurrencies especially when there’s a risk of a crash. The lending process of DAI tokens is somehow similar to the traditional collateralized loans. The users can obtain DAI tokens by locking their ETH or other crypto assets in a smart contract.
The lender can sell these assets using an internal market-based auction mechanism if the terms and conditions of the contract aren’t met. Similarly, the borrowers can recover their crypto assets by returning the DAI tokens whenever they want. They need to pay a fee while recovering their assets.
How Does DAI Work?
DAI maintains its value by using Target Rate Feedback Mechanism (TRFM). The TRFM increases when the price of DAI goes below $1. The investors start investing in the coin to take advantage of the price drop. Thus, the price of the DAI token gets back to $1 due to increased demand.
As it’s mentioned above, the cryptocurrency holders can get the DAI tokens by locking their crypto assets. DAI is usually over-collateralized to manage the volatility of cryptocurrencies. For example, if a user needs 100 DAI tokens, he needs to lock $200 worth of ETH in the smart contract.
Now, even if the ETH price drops by 20-25%, DAI would safely collateralize the debt. The borrowers need to pay a stability fee whenever they want to recover the locked cryptocurrency.
Use Cases of DAI Tokens
With a market cap of $9.4 billion, DAI is one of the leading stablecoins. It currently has a circulating supply of 9.4 billion DAI tokens. It doesn’t have a maximum supply because users can create their desired amount of DAI tokens by locking their crypto assets.
Hedging – DAI helps with absorbing the volatility of cryptocurrencies by maintaining its value at $1 in any situation.
Exchange with Fiat – DAI is one of the most popular assets in the Decentralized Finance. The users can either exchange it for fiat currencies or use it to buy some goods.
Passive Income – DAI token holders can lend their DAI deposits through Coinbase to earn a two percent return per year. This facility is available in countries like the United States, Australia, Spain, the United Kingdom, France, and the Netherlands.
Why is DAI a Better Stablecoin?
USDT and USDC are the most popular stablecoins in the crypto space. These coins have successfully maintained their value over the years because they are backed by physical assets. But these tokens are managed by centralized authorities. Thus, the users can’t truly achieve decentralization by using these tokens.
On the contrary, DAI is a decentralized solution that is managed through smart contracts. Nobody can interfere with Dai coins and addresses.
Why is DAI Popular in Defi?
DAI enables interaction between smart contracts because it’s a decentralized cryptocurrency. According to a survey, more than 400 apps have integrated DAI. The users can exchange information between different Ethereum-based platforms by using this protocol.
How to Get DAI Tokens?
The users can directly generate DAI tokens through MakerDAO. The users receive the loan in the form of DAI tokens when they apply for the loan. Once the loan is paid back, DAI tokens are destroyed. Users can also purchase DAI tokens from different exchanges.
Conclusion
DAI is one of the most popular stablecoins in terms of market cap. Unlike other stable coins, it’s backed by crypto assets. The users need to lock their crypto assets to receive the DAI tokens from MakerDAO. We’ve shared information about how the DAI token is different from other stablecoins and how its value is kept stable. If you need more information about DAI tokens, feel free to get in touch with us.