DAI Stablecoin: Everything you need to know

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    By Amee Mehta
    Oct 20th, 2023

    DAI is an Ethereum blockchain ERC20 token with a fixed value of one US dollar. It also serves as the foundation for the MakerDAO loan scheme. DAI is formed when a loan is taken out on MakerDAO. It's the currency that people borrow and pay back.

    DAI is simply a stable Ethereum token once it has been created. It is conveniently transferable between Ethereum wallets and can be used to pay for items. DAI is a product of MakerDAO, the company created by the current CEO, Rune Christensen.

    What makes it so unique?

    The price of DAI is held in check by a series of smart contracts that execute themselves automatically. Maker (MKR) tokens are burnt or made if the price of DAI varies too much from one dollar. This helps to keep the price of DAI stable. MakerDAO's algorithms control the price of DAI automatically, but no one individual can be relied on to keep the currency stable.

    MKR holders prosper if the scheme operates as expected and one DAI equals one US dollar when the overall availability of MKR reduces, making MKR more rare and expensive. DAI's price has been consistent for more than three years, with only small variations from its one-dollar price peg.

    What else is different?

    Since DAI is just an Ethereum token, anyone can use or create with it without needing permission. DAI is an ERC20 token that can be used as a building block in any decentralised application (dapp) that requires a secure asset or payment mechanism.

    DAI can also be wrapped in various smart contracts and modified for various purposes. xDAI, for example, takes DAI and places it on a superfast, low-cost sidechain to make transactions and payments more convenient and effective. Chai and rDAI take standard DAI and place it in an interest-generating tank, allowing users to monitor what happens to the interest as it builds up.

    How is DAI produced?

    When anyone takes out a loan on MakerDAO, DAI is developed. When loans are repaid, DAI is killed.

    What is the best way to obtain DAI tokens?

    Taking out a loan on MakerDAO's Oasis website is the quickest way to get DAI. On the same forum, you can share DAI or use a centralised exchange like Coinbase.

    What can DAI be used for?

    One of the most common applications for DAI is as a secure hedge or counterweight to the instability of more mainstream crypto-assets like Ethereum or Bitcoin. DAI's steady valuation makes it a decent investment or trading option for those who think the price is going to fall.

    Since DAI is so stable, it's one of the best crypto assets to invest in. The Coinbase Card is a Visa card that allows users to invest DAI and other crypto assets by converting them to fiat. You may also use the Monolith Visa debit card to invest DAI whether you are in the UK or Europe.

    DeFi and DAI

    DAI has become one of the most popular assets in the Decentralized Finance (DeFi) ecosystem, thanks to the 2020 boom in DeFi. A host of services have sprung up that will lend money against DAI deposits Coinbase customers in the United States, the United Kingdom, the Netherlands, Spain, France, and Australia will receive 2% a year on their DAI deposits. Users of the dPiggy dapp will gain interest while still having their earnings automatically used to buy a number of crypto assets at the end of each month. DAI can now be created using Bitcoin.

    Stablecoins in the crosshairs

    DAI's stability was challenged by a market collapse in March 2020, so developers added a contentious feature that enabled it to retain its peg with the help of another stablecoin, USDC.

    Then, in July 2020, a change to one of the main DeFi lending protocols forced DAI to deviate from its peg once more, prompting the group to vote to raise the system's debt ceiling. The next month, it voted to use GUSD, BUSD, and eight other tokens as collateral, allowing them to be used to build DAI and increase liquidity.

    Recently, regulators have focused on stablecoins; the new STABLE Act in the United States will keep stablecoin issuers to some of the same requirements as banks. Such legislation may have significant ramifications for a decentralised stablecoin like DAI.

    If the STABLE Act (or anything similar) passes, Peter Van Valkenburgh, research director at crypto activism non-profit CoinCenter, believes that DAI validator nodes will be in breach of the law because they are chartered banks.

    The Future

    MakerDAO is working hard to establish DAI as the “world's first impartial currency,” and it's starting with the emblem, which it hopes will be as widely recognised as the dollar ($), euro (€), and pound (£) icons.

    DAI would have to be accepted and used by millions of people in order to become the first trustless mainstream currency–a challenge that would necessitate not just branding, but also promotion and education. No other stablecoin is best suited to make that possible, despite the fact that it is a difficult challenge.

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