DAI coin is an ERC-20 dollar-pegged token issued by the MakerDAO decentralized platform on the Ethereum blockchain. In other words, the DAI token is a stablecoin, that is, a digital analogue of the dollar, but, unlike it, is decentralized and not controlled by anyone.
Although the MakerDAO platform was founded in 2015, the Maker protocol itself, which manages the DAI cryptocurrency, was created in 2017. DAI coin became one of the first stablecoins and one of the few truly decentralized, which we will discuss below.
What Are DAI Key Features?
There are two versions of DAI coin: single-collateral (SAI) and multi-collateral. Single-collateral DAI can only be backed by one cryptocurrency, while multi-collateral DAI can be backed by several. Multi-collateral DAI holders can make deposits in cryptocurrency and earn from it.
The rates of cryptocurrencies, such as DAI coin, are regulated by the algorithmic protocol on which they operate. Tokens are not issued arbitrarily by miners: they are only released when the user makes a deposit. DAI coin holders can earn income simply by holding an asset in a wallet, lending stablecoins to other users, or adding them to liquidity pools.
The first thing that distinguishes DAI coin from other stablecoins is its complete decentralization. For example, to receive USDT tokens, you need to buy and deposit the equivalent amount in USD currency. This means that you will have to trust a centralized issuer that holds foreign exchange reserves and provides custodial services (with the participation of third parties).
The issuance and exchange of DAI coin is fully controlled by a smart contract, ensuring autonomy and sovereignty from intermediaries. And instead of fiat currencies, holders use digital assets to secure collateral.
But this is not the only feature of DAI. A stablecoin can be backed by multiple cryptocurrencies. You can use various digital assets for collateral: ETH, BAT, WBTC and even other stablecoins such as USDC.
The creators of MakerDAO in 2014 developed a Collateralized Debt Position (CDP) mechanism based on Ethereum smart contracts and underlying the Maker architecture. This protocol not only stabilizes the DAI coin rate, but also provides an efficient mechanism for margin trading. A user can generate any number of DAI stablecoins by providing a cryptocurrency collateral. Here's how it works:
The user connects their wallet to the Maker platform and deposits an amount of collateral that must exceed the amount of DAI coin to be issued. The conditions can be chosen by the user himself, but the amount of the deposit is determined by the platform. For example, to receive $100 in DAI tokens, you can deposit $200 in ETH. This will reduce the risks from a fall in the value of the pledged cryptocurrency.
After that, the smart contract blocks the cryptocurrency that the user deposited, creates the specified amount of DAI and sends it to the wallet.
The user can use the funds in any way: trade them, add to liquidity pools, issue loans or make deposits in DAI – there are no restrictions.
If the user wants to get their investments back, they need to deposit the borrowed DAI tokens to unlock the crypto assets and return them to their wallet. After that, the returned stablecoins are burned. If the value of the collateral drops to roughly equal to the amount of DAI borrowed, it will be automatically liquidated and the user will no longer be able to unlock their funds. This is the main risk of issuing DAI stablecoins backed by volatile cryptocurrencies.
As long as investors hold cryptocurrencies such as ETH or BTC, the coins do not generate additional income. By creating DAI coin, users get the opportunity to use tokens for additional investments.
For example, you can pledge Bitcoin, receive a DAI stablecoin and also invest it in BTC or another cryptocurrency, and then repeat the procedure again – and so on. This will allow you to increase the amount of the portfolio in order to get more profit from the growth of the cryptocurrency rate.
Keep in mind that with this approach, the risks will also increase many times over. If the cryptocurrency exchange rate falls sharply, then you will lose part of your savings when the collateral is liquidated. With a collateral of 2:1, the amount of your funds will decrease at least two times.
Another scenario for using DAI coin is to generate passive income via yield farming using DeFi platforms. You can earn interest if you make a deposit or lend to other users. In this way, you will profit from investments in cryptocurrency and from yield farming.
Is DAI Trusted?
The DAI cryptocurrency exchange rate is stabilized by the Target Rate Feedback Mechanism (TRFM), an automatic algorithm that regulates the DAI price and maintains the exchange rate at approximately $1 with minimal deviations.The TRFM mechanism is activated when the DAI stable price deviates from the target value, in order to then restore it. Take a look at the DAI cryptocurrency chart to see how the price stabilization mechanism works.
Is DAI Safe?
DAI advantages include:
There are no geographic or demographic restrictions. Any user anywhere in the world can exchange their assets for DAI and use them how and where they want.
There are no limits. Some countries have a minimum amount for opening a bank account, which is not available to everyone. It only takes $1 to get DAI.
Price stability. DAI will protect capital from the volatility of cryptocurrencies and serve as a tool for hedging risks.
Decentralization. Blockchain technology provides transparency, and the operation of the platform is governed by an autonomous smart contract and does not depend on any central node. This eliminates the need to trust a third party.
Getting income. Holders can generate passive income by participating in yield farming and receive higher interest than bank deposits. Staking DAI is an efficient way to increase token holdings.
You can quickly transfer any amount of DAI to another user for less than a bank transfer.
What Are Risks of Using DAI?
DAI disadvantages include:
Large commission of the Ethereum network. During periods of high activity, the fee for gas reaches several tens of dollars, which makes the network unsuitable for making small transactions.
Risks associated with the collateralization of cryptocurrencies. If volatile digital assets are used for collateral, then the collateral may be liquidated if the collateral amount becomes less than the borrowed DAI amount, taking into account accrued interest.
Where to Buy and Store DAI?
DAI tokens are traded on many centralized and decentralized crypto exchanges. Stablecoin can be stored in any wallet that supports Ethereum cryptocurrency and ERC-20 tokens.
What Are DAI Prospects?
As the popularity of the DeFi market grows, the prospects for DAI cryptocurrency will only increase. This is due to the fact that the stablecoin serves as the best analogue of fiat currency and provides users with not only more freedom, but also many options for generating income, bypassing banks and other centralized financial services.
