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- DAI is a rising stablecoin that runs on the Ethereum blockchain.
- The organization behind DAI is MakerDAO, a Decentralized Autonomous Organization.
- It was previously known as SAI and was upgraded to multi-collateral DAI in 2019.
- DAI is soft pegged to the US dollar with the 1:1 ratio.
- The total supply of DAI tokens is 6.86 billion (as of 11th Oct), there is no maximum supply.
DAI is a stable peer-to-peer (P2P) cryptocurrency or simply put, a stablecoin. Unlike normal cryptocurrencies, stablecoins are not fraught with the inherent risks of volatility. DAI is a crypto-collateral backed stablecoin that was previously powered by only the Ethereum blockchain network. It is soft pegged to the US Dollar, which means that 1 DAI token is equivalent to around 1 USD, at any given point in time. Note that, 1 DAI may not be equal to exactly 1 USD, because it is soft pegged and is free-floating, however in the event of an Emergency Shutdown, each Dai is redeemable for $1 worth of collateral.
Dai is overcollateralized, so that any market fluctuations do not affect it significantly. This makes it more stable, secure and trustworthy.
How does DAI work?
Ever since its inception in 2017, DAI has always aimed to address the necessity of stablecoins in the crypto space. Dai is a crypto-collateralized stablecoin, which functions similarly to fiat-collateralized stablecoins. However, with crypto-collateralized stablecoins, it is necessary to maintain a ratio of more than 1:1, to back the stablecoin to absorb price fluctuations in the cryptocurrency being used as a collateral.
One of the key highlights of DAI is that it was not created by a single person or a small group of co-founders, the development of the software that powers it and the issuance of new tokens is governed by the MakerDAO and Maker Protocol.
To ensure that DAI is soft pegged to its underlying value, the process involves:
- Keepers: Keepers are mostly bots that are always on the lookout for arbitrage opportunities.
- Dai Savings Rate (DSR): The Dai Savings Rate allows DAI holders to lock their DAI tokens into MakerDAO, to earn savings automatically. MKR token holders can increase the DSR, if DAI’s price falls below $1 as it will encourage people to buy and stake DAI. This results in an increase of the buy demand, to get DAI’s value back to $1 and vice-versa.
MakerDAO
MakerDAO was originally founded by a Danish entrepreneur, Rune Christensen in the year 2014. Prior to working on the Maker ecosystem, Christensen studied biochemistry and international business in Copenhagen and founded Try China, an international recruiting firm.
The organization behind DAI is the Decentralized Autonomous Organization, MakerDAO which believes that blockchain-based tokens will eventually replace traditional certificates in the capital structure of organizations.
MakerDAO functions in a decentralized manner with the usage of smart contracts that are self-enforcing agreements in the form of software code and executed on the Ethereum blockchain.
The DAO has partnered with numerous established projects in the crypto space such as Coinbase, Foundation, Wyre, Metamask, Ledger, Open Sea, 1inch, UniSwap, League of Kingdoms amongst others to offer a diverse range of products. MakerDAO’s investment partners include a16z, Paradigm, Polychain, Dragonfly Capital and more.
MKR Tokens
This organization is democratically managed by the holders of its governance tokens, the Maker (MKR) tokens, which behave similarly to a traditional company’s stock. MKR holders can vote on decisions regarding the development of MakerDAO, Maker Protocol and DAI. Their voting power is proportionate to the amount of Maker tokens that they own.
MKR tokens are ERC-20 tokens with a maximum supply of 1,005,577 MKR tokens.
Holders of the MKR tokens can vote on proposals regarding addition of new collateral asset types, changes in risk parameters for existing collateral asset types, initiating an emergency shutdown, upgradation of the system and many more.
MKR token holders are responsible for adjusting and setting the stability fees on the MakerDAO platform, which means that they are in control of the supply of the DAI token as they have the power to encourage or discourage the creation of DAI loans.Besides this, they can vote for any changes in the Dai Savings Rate, which is a staking tool on the MakerDAO platform.
Thus, MKR token holders strive to maintain MakerDAO’s stability.
How to mint DAI?
DAI can be minted only through the MakerDAO platform. The steps to mint DAI are:
- A Web 3.0 Wallet: Interaction with the MakerDAO platform requires a Web 3.0 digital wallet (For example, Metamask) which serves as a bridge between your digital assets and the Maker platform. Choose the cryptocurrencies that you wish to deposit as collateral and ensure that they are deposited into your wallet.
- Oasis: The MakerDAO protocol’s front-end interface is Oasis. Connect the Oasis application to your digital wallet.
- Vaults: After connecting Oasis to your wallet, choose a vault from the dashboard that corresponds to the cryptocurrency that you wish to deposit as collateral. Configure your chosen vault by entering the number of tokens that you wish to deposit.
- Confirm: Confirm the deposit of your chosen cryptocurrency tokens through your wallet. When the transaction is completed, a CDP will be opened and the corresponding DAI will be minted. Then, these DAI tokens will be sent to your wallet, which can be used within the wider crypto space.
If the value of the collateral falls below the Liquidation Ratio (currently, 150% to the value of the minted DAI), the collateral assets will undergo liquidation.
Note that, in case you wish to recover your deposited collateral, you will be required to pay back DAI loan, completely and the stability fees. Once the CDP is closed, your collateral will be returned to your respective Web 3.0 digital wallet.
What makes DAI unique?
DAI’s key advantage lies in its soft peg to the price of the U.S. dollar
Maker DAO’s algorithms automatically set the price of Dai. No single person is entrusted to keep the currency steady. Price fluctuation of DAI, away from the US dollar results in burning or creation of Maker (MKR) tokens, to stabilize the price.
However, if the system works as intended, the DAI price will remain stable, in this case, the number of MKR in supply will reduce, thereby MKR tokens become rare, hence more valuable and the holders benefit. For more than three years now, DAI has remained stable with only minor fluctuations from its one-dollar price tag.
Besides this, anybody can use or build with DAI without permission, as it is simply a token that is powered by the Ethereum blockchain. As an ERC-20 token, DAI serves as a pillar that can be incorporated into any Decentralized Application (dApp) that requires a stable payment system. In different smart contracts, developers include DAI and modify it for different purposes.
Where is DAI used?
DAI is predominantly used in five areas:
- Inflation protection and savings: As DAI is an user-created decentralized stablecoin, Dai has no centralized issuer or administrator and thus users are in full control of their funds. This means that regional volatility does not affect DAI’s value, hence holding independence of its own.
- DeFi products and services: Dai is undoubtedly the most used cryptocurrency in the DeFi space and adds significantly to the growth of DeFi. With the rapid progression of dApps, Dai can be readily incorporated into these applications and thus it is heavily relied on.
- Gaming: Dai is easily one of the most ideal tokens for the gaming world as it is borderless and cannot be devalued by anyone, it is a stable currency that can be controlled exclusively by its holders. It has been utilized in numerous popular games such as Axie Infinity, Forgotten Artifacts and Marble Cards.
- Digital art: With rising digital artists comes the age of NFTs, and Dai serves as payment for digital art. Dai has been integrated into emerging platforms such as OpenSea, Foundation and many more.
E-commerce: Till today, payment processes across the globe have been largely inefficient and cryptocurrency is solving the problem. that decades of e-commerce’s existence could not improve. This includes Dai which is in the process of transforming payments for merchants, who can accept Dai payments with absolutely no worries. Now, Dai can be spent online as well as in physical stores using Visa or Mastercard linked cards that are powered by Dai.
Dai is currently integrated with over 400+ apps including DeFi platforms, wallets, games and more.
Besides this, Dai is making significant impacts in the real world, as a truly borderless, decentralized and transparent digital currency.
At the time of writing this article, DAI’s market capitalization was at 6.86 billion USD and ranked at #31 on CoinMarketCap. This depicts Dai’s tremendous growth.
With five years of rapid growth, DAI hit the 1 billion mark in 2020. Tap here to look back on their remarkable journey.
DAI is on its journey to be the first ever unbiased global currency, and they are reaching their goals faster than ever.
In addition, the team plans to create a logo or a symbol that represents DAI on a global scale symbol, similar to fiat currencies such as Euro, Pounds, and USD symbols.
DAI is already in the process of garnering global recognition, along with its growing adoption on DeFi Projects. As the number of projects use it, it will be easier to get millions of users to its ecosystem.
This chart represents the adoption of DAI by users, is in a healthy uptrend
You can now buy, sell or trade DAI with INR on Bitbns!
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