As you can see, fundamentally Dai is a loan taken against Ethereum. With MakerDAO, ETH users can request for Dai loans against their Ether holdings. The process begins with turning userâ€™s ETH holdings to the ERC-20 token called WETH . Upon doing so, WETH joins the pool of Ethereum, which is used as collateral for all issued DAI tokens. Next, PETH is locked to create a Collateralized Debt Position , and users receive Dai tokens which they are free to use. In 2019, MakerDAO experienced internal struggle over whether it should integrate more with the traditional financial system.
By increasing supply, MakerDAO managed to nudge Dai’s price back down, but at the cost of increased centralization. Borrowers who hadn’t yet been hit rushed to close out their loans, only to find that very few Dai holders were willing to trade their stablecoins for other rapidly plummeting assets. The confluence of these conditions resulted in few new loans, meaning less Dai was being generated. With reduced supply and increased demand, the price of Dai started to rise. Dai is a stablecoin; soft pegged to USD through automated smart contracts on the Ethereum blockchain.
A stablecoin is a cryptocurrency where the price is designed to be pegged to a cryptocurrency, fiat money or to an exchange-traded commodity such as gold or precious metals. This system of governance allows the Maker Protocol to be controlled by its users instead of a central authority. Maker currently has a pretty high value of over $900 and, as you may have guessed, is not pegged to any other asset, so it is therefore not a stablecoin like Dai. MKR can also be used as a utility token to pay interest fees on the MakerDAO platform. On top of this, DAI is a totally decentralized asset, unlike many other popular stablecoins like Tether.
And, because Dai is an ERC-20 token, it can be stored in a wide range of well-known wallets, including MetaMask, Atomic Wallet, and Exodus. MakerDAO’s existence on the Ethereum blockchain also allows it to support smart contracts, which we’ll discuss later. A stablecoin is a cryptocurrency that is pegged to another stable asset. Pegging is the practice of fixing the exchange rate of one currency to the value of another currency. Having a stablecoin opens up many new financial possibilities for this burgeoning sector that were not possible before due to volatility. Not only does Dai offer stabilization, but is also offers transparency and decentralization, since it is built on top of the Ethereum network.
Technically, any asset could be used as collateral, as long as it resides on the Ethereum blockchain. In the future Maker has plans to include support for other assets, and eventually it should be possible to use any ERC-20 asset to create a CDP. When the price of DAI rises above $1 ETH holders are able to create DAI for just $1 and sell it for more than $1.
Holders of other currencies can first borrow Dai by storing collateral in vaults and then staking that borrowed Dai instead of the original coin. Dai’s proposition as a safeguard against inflation has led to incredible success in Latin America, especially Brazil, Colombia, Venezuela, and Argentina. In particular, concerns over hyperinflation in Argentina have made Dai its most popular cryptocurrency by volume, ahead of even BTC. The Dai project has not come without controversy, as reflected by the resignation of MakerDAO CTO Andy Milenius in an April 2019 open letter. In the letter, Milenius stated that Christensen had attempted to take full control over the DAO and that senior management was favoring traditional corporate efficiency over the DAO’s original goals. In November of the same year, Dai moved from its original single-collateral system to its current status, the multi-collateral system .
DAI also added a banking and financial services unit around this time. In 1995, we invested in London, U.K.-based Graham Bannock & Partners Ltd., which would go on to give DAI what is now a thriving presence as an implementing partner for British and European clients. You could technically call Dai an algorithmic stablecoin, but this isn’t strictly true because it is collateralized. This potentially makes DAI a less risky investment, as non-collateralized algorithmic stablecoins can come crashing down worryingly easily (as you may have seen in the LUNA/UST crash). Simultaneously, this also causes users who hold Dai to gain profit, leading to an increase in demand for Dai.
If one wants to take a loan in Dai, the Maker coin is used to pay the â€œstability fee.â€ MKR coins canâ€™t be mined and are burned in the settling process. As of January 2019, Dai is the main Makerâ€™s product, but future plans include adding different currency peg (e.g., USD-DAI or EUR-DAI), and collateralization of ERC-20 tokens. A stablecoin is a type of cryptocurrency that is pegged to a specific asset or group of assets, such as a currency, commodity, or basket of assets. The goal of a stablecoin is to provide the benefits of a cryptocurrency, such as fast transaction times and low fees, while maintaining price stability.
For example, if the Sensitivity Parameter is defined as “10% in 15 minutes” by Maker voters, then the Target Rate cannot change the price of the market by more than 10% within a span of 15 minutes. This means that the maximum hourly change in price of Dai that the TRFM can make is 40% from where Dai was at the beginning of the hour. This restriction ensures that there is enough time to trigger a global settlement in the event that an attacker gains control over a majority of the oracles. Maker is able to make Dai a Stablecoin due to its Target Rate Feedback Mechanism . The TRFM is an automatic mechanism that the Dai Stablecoin System employs in order to maintain stability.
MakerDAO was founded in 2014 by the Danish entrepreneur Rune Christiansen. The idea behind its creation was that it was “dedicated to bringing stability to the cryptocurrency economy”. This is an important concept because, as anyone who has been following the world of crypto will tell you, cryptocurrencies can be incredibly volatile. People can also earn interest by locking their DAI funds in a Dai Savings Rate smart contract. At the moment, MakerDAO offers a rate of 0.1% on deposited DAI.
Let’s examine how exactly it is different from competing stablecoins. Stablecoins are cryptocurrencies tied to a fiat currency, often the U.S. Tether is one such example of a stablecoin, which is linked to the dollar.
The cryptocurrency industry is notoriously risky and unpredictable, so the option of stablecoin investment allows individuals to have a little more faith in the long-term trajectory of their funds. In addition, Dai’s clear focus on reliability and stability makes it a particularly solid option for those who want to invest in cryptocurrency to use it in the DeFi world. And, as the DeFi industry continues to diversify and flourish, we may be seeing Dai and MakerDAO become even more prevalent. Underpinning the entire MakerDAO ecosystem is the Maker Protocol, also known as the Multi-Collateral Dai system. This borrowing system requires crypto collateral deposits on behalf of the user. Each Dai token is collateralized accordingly, with the token being deposited by the borrower.
The Maker team has plans to eventually peg DAI to Digix which is a token that is backed by physical gold. In the future other stablecoins pegged to other major currencies, commodities or even equities can and will be created. If the price of DAI fluctuates too far from one dollar, Maker tokens are burned or created in order to stabilize the price of DAI.
You could deposit 10 ETH into a CDP (at time of writing, that is $1050 USD), generate the equivalent in Dai, and then send that 1050 Dai to the AICO. Let’s say AICO crashes and you want to cut your losses, so you sell AICO back into Dai, but now you only have $800 worth of Dai. Users are incentivized to hold their DAI on the platform, which is then lent out to borrowers. As a result, lenders earn interest on their holdings once the borrower pays it back. Some of those rewards go toward the platform’s development, while the rest is paid out to the user. Users who hold this token can participate in the governance process, and deliberate on changes and upgrades made to the network.
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In this way the USD value of Dai can be said to be backed by the USD value of the underlying collateral held by MakerDAO’s smart contracts. As the dominant crypto-collateralized stablecoin, DAI has been a proven success. The system mitigates the volatility of crypto all without fiat collateralization, which is quite a feat.
What Is Dai (DAI) and Why Is It So Popular?
These assets make it easier for traders to participate in the crypto network of their choice. DAI can be purchased outright on either centralized cryptocurrency exchanges or DEXs. Using the Maker Protocol, you can also borrow DAI by depositing Ethereum-based assets as collateral to underwrite the amount of DAI borrowed. DAI requires a larger collateral deposit than the amount of DAI borrowed to ensure network liquidity.
Plus, if you can hold enough DAI to earn reasonable interest while lending, it might be worth considering. Decentralized finance is essentially traditional financial applications, such as lending and borrowing apps, powered by the blockchain. Considering the blockchain omits the need for a third party, how do we make sure everyone on the network follows the rules? The fact that DAI uses Ethereum and pegs its price to USD is mostly base on their preeminence. The Maker developers chose to use ETH because it is the most important asset on the Ethereum blockchain. Similarly, the USD is the global reserve currency, so it made sense to peg to the USD.
ERC stands for “Ethereum Request for Comment,” which is the standard developed in 2015 that creates and enables smart contracts on the Ethereum network. To date, the largest market cap stablecoins have been fiat-backed. These operate by keeping a supply of reserves that back up the stablecoin. In this article, we’ll examine one of the most famous examples, MakerDAO, and exactly how it maintains a $1 peg with volatile collateral. Stablecoins are hugely popular cryptocurrencies that offer a middle ground between traditional finance and digital assets.
If ETH crashed, the debt in a CDP would be worth more than the collateral held. Maker would then have the ability to recapitalize the market by automatically decreasing the supply of PETH, which would increase demand and, in turn, increase the price of Dai. This then increases the value of the collateral in a CDP and decreases the overall value of debt. Stable and relatively low-risk assets like fiat, precious metals, and property are the usual favorites for collateral.
Finally, if you want to know where the name DAI comes from, it is the name of a Chinese character that translates as “to lend” or “to provide collateral for a loan”. The most important thing to note about the DAI coin is that it is what is known as a “stablecoin”. MakerDAO currently stands as one of the most popular DeFi projects in the crypto industry, along with other big players like Uniswap and Yearn Finance. In fact, MakerDAO currently has over two million ETH locked from user deposits, so it’s safe to say it’s become a widely successful DApp. There are many intricacies to the system, but I believe these are the main mechanisms in place if one wants a brief overview of how Maker gives Dai its stablecoin properties.