Key Features of DAI
- Ethereum-Based Stablecoin: DAI is an Ethereum application built on the Ethereum blockchain, functioning as a stable cryptocurrency (stablecoin) pegged 1:1 to the US dollar.
- Decentralized & Trustless: Unlike centralized stablecoins like Tether or USDC, DAI operates without a central authority, enabling global transfers without intermediaries like banks.
- Volatility Hedge: Commonly used to mitigate crypto market fluctuations and in decentralized finance (DeFi) services like lending and interest-bearing funds.
The MakerDAO Origin Story
DAI was created by MakerDAO, an open-source project launched in 2014 by Danish entrepreneur Rune Christensen. Key milestones:
- 2015: Development of Maker Protocol, enabling crypto-collateralized loans.
- 2017: DAI debuted via Ethereum smart contracts, offering a decentralized, non-volatile currency.
- Community Governance: Christensen relinquished control to the Maker (MKR) token holders, who now vote on protocol upgrades.
👉 Explore decentralized finance with MakerDAO
Smart Contracts Explained
A smart contract is self-executing code on the blockchain that automates agreements without third parties, ensuring trustless transactions.
How DAI Maintains Its Peg
Collateralization Mechanism
DAI’s value is backed by overcollateralized crypto assets (e.g., ETH) locked in Market Vaults:
- User deposits 150%+ of the loan value in crypto (e.g., $150 ETH for $100 DAI).
- DAI is minted and loaned to the user.
- Repaying DAI + a small fee reclaims the collateral.
Liquidation Safety Net: If collateral value drops below 150%, assets are auto-sold to protect the system.
Why Borrow DAI?
- Liquidity Without Selling Crypto: Access cash without offloading holdings.
- Interest Arbitrage: Earn via DeFi funds (e.g., Aave, Curve) where yields may exceed loan costs.
How to Buy and Store DAI
- Purchase: Use exchanges like Firi for low-cost DAI acquisitions.
- Storage: Hosted wallets on platforms (e.g., Firi) simplify security—no private key management needed.
- Transact: Send/receive DAI globally, 24/7.
FAQs
1. Is DAI truly decentralized?
Yes. Unlike Tether, DAI’s supply is governed by MKR token holders, not a central entity.
2. What happens if my collateral’s value drops?
The protocol liquidates assets to maintain the 150% ratio, plus a fee.
3. Can DAI lose its peg?
Rarely. The system adjusts collateral ratios and interest rates to stabilize the peg.
4. Where is DAI used most?
Predominantly in DeFi: lending platforms, yield farming, and as a hedge.
5. How does DAI differ from USDC?
USDC is centralized (issued by Circle), while DAI is decentralized and crypto-backed.
Conclusion
DAI merges stability with decentralization, enabling hedging, loans, and yield opportunities in crypto. Its overcollateralized design ensures reliability, making it a cornerstone of DeFi.