What is DAI?

19 July 2021

Stablecoins

 Coin developers have spent the last few years creating stablecoins to attract more risk-averse investors. In contrast to cryptocurrencies, a stablecoin’s value is tied to a real-world currency like the dollar or a commodity like gold.

By relying on real-world assets, stablecoins offer more stability than cryptos like Bitcoin or Ethereum. Stablecoins enjoy the instant processing and privacy of cryptocurrencies with the reliability of real-world currencies and commodities.

There are a few big players in the stablecoin industry, and the differences between them can be a bit confusing.

Tether and USDC are two of the heavy hitters. Both preserve a ratio of one dollar to one token, meaning that for every token available to trade, a dollar is held back as collateral. It’s similar to how casinos need to have enough cash in reserve to cover every chip on their gaming floors. That’s how it’s supposed to work at least.

Plenty of critics have expressed doubts that Tether can cover its tokens. The Financial Times reported in May that just under three percent of Tether’s tokens were covered by cash.

How is DAI different? 

 ​DAI is an improved, decentralised stablecoin. Unlike the other stablecoins, no person, company or financial institution maintains or controls its value.

When you buy DAI, you’re technically taking out a loan through MakerDAO, the company that created DAI. Like other stablecoins, DAI maintains a constant value of one US dollar.

DAI uses collateralised loans, where you put up assets in exchange for DAI. The amount of collateral is in a constant state of change while people take out or pay back loans. When you deposit assets in exchange for a loan, you’re paid in DAI, which maintains a constant value of one dollar.

When you deposit crypto, you automatically create DAI through smart contracts (contracts that automatically execute using code). Should the currency fluctuate outside of a one-dollar value, smart contracts burn or create DAI.

DAI is permissionless, unbiased, and truly decentralised. Anybody can use it at any time. It gives you a way to participate in the global financial system without handing over your personal data. You don’t need proof of credit, and you don’t need to fill out lengthy forms.   You can use DAI just like any other tradeable cryptocurrency or stablecoin. You can pay for products and subscriptions and transfer value internationally, among other uses. Once you’re finished using DAI, you can return it to the protocol and pay a small fee to recover your collateral.

If you spent the DAI elsewhere, the protocol liquidates your collateral, selling it through an automated market-based auction.

How can DAI help you hedge against crypto volatility?

You can store part or all of your portfolio in DAI. When you buy DAI through MakerDAO, you deposit crypto as collateral and are given DAI in return.

Should the market take a downturn, your collateral is sold off and you keep your DAI, which you can sell for cash. If the market booms, you can return the DAI for the crypto you deposited and sell the crypto for profit. This makes DAI an incredibly useful tool for hedging. It’s also great for earning a passive income.

Once you’ve bought DAI, you can stake it to earn passive interest. The amount you can earn depends on where you stake it, but you can earn between 1-10% annually. Coinbase currently offers two percent annual interest. You may have already realised that you can combine these two benefits. For example, if you’re on the fence about Ethereum, you can buy some and use it as collateral in exchange for DAI. You can then stake the DAI in exchange for interest while you wait to see how Ethereum looks long term.

Should the value increase, you can exchange your DAI for a fee and sell your Ethereum for a profit. If it tanks, you keep the DAI and recover your cash.

Could it all fall apart? 

To ensure the protocol stays intact, you must deposit crypto of a higher value than you need to borrow. When the collateral falls below a certain value it’s automatically liquidated and used to pay off the loan plus any penalties or fees. The threat of losing collateral prevents people from borrowing irresponsibly.

To balance the threat of price swings, MakerDAO uses another token to pay off the missing loans, called Maker (MKR).

MKR holders can vote on how DAI is used. For example, they can change which cryptos are used as collateral, or how much they would sell for when liquified. MKR is essentially the development side of the DAI coin.

MKR is essential to pay off the debts when the prices swing too far. In a market crash, for example.

Why would anyone hold MKR if it’s used to pay off debts?

Well, it’s only used to pay off debts if the market collapses. If the market stays buoyant, and the DAI stays at $1, the number of MKR in circulation decreases, which drives the price up. MKR has moved from $24.45 to $2521 in just four years.

What’s the long-term outlook for DAI?

DAI’s developer, MakerDao, aims to give everyone a way to realise the advantages of digital money without going through drawn-out registration procedures.

MakerDAO is a decentralised company built on the Ethereum blockchain. When we say a company, it’s not a bunch of guys sat around an office. It’s more of a group of Maker enthusiasts and developers who have established a community.

By combining crypto with stablecoins, MakerDAO helps anyone looking to hedge their crypto trades and reliably predict how much they stand to lose or gain.

Long term, DAI will help us transfer funds internationally with rock-bottom remittance fees and hedge against volatile markets.

Who is using DAI now? 

Numerous app and game developers already use the platform.

Anybody can build decentralised apps, also called Dapps, on the Ethereum blockchain using Dai. You don’t need anyone’s permission, and it’s free. Games like League of Kingdoms and charities like Red Cross Argentina accept Dai already.

Citizens in Argentina, can use DAI to fend off inflation. In the UK or Europe, you can spend DAI using the Monolith visa debit card.

DAI is in an amazing position to corner a large part of the growing stablecoin market. It’s also a great place to shield yourself from the crypto market’s inevitable volatility. DAI is a crypto for the future.   

Register for the prototype

The next step on our roadmap is to ask for your help. We want to hear from you what works and what does not, which features are more important to you and which ones are lacking. In short, we need your guidance.

To facilitate this, we are creating a beta of our platform and are looking for a thousand pioneers to put it through its paces. We will expect a lot of feedback and suggestions from these pioneers over the next two to three months. However, these pioneers are not volunteers, when we launch each pioneer will have bestowed upon them 10,000 edifyqs.

If you see yourself as a pioneer, register for the prototype and explore the future.

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