What Is DAI Cryptocurrency?

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Updated: March 29, 2022

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    Dai (DAI) is one of two native cryptocurrencies of the Maker Protocol, an open-source software application maintained by the MakerDAO (Distributed Autonomous Organization).

    Dai, whose ticker is DAI, is a decentralized stablecoin. That means it’s not managed by a central authority or organization but by smart contracts. It’s also soft-pegged to the U.S. dollar (so it’s correlated to USD but not backed by actual dollars), in an effort to keep its value relatively steady compared with other cryptocurrencies.

    The utility and governance token of MakerDAO is MKR, which is used to stabilize the price of Dai crypto.

    Dai was created to facilitate crypto lending, which is the main focus of the Maker protocol. But as an ERC20 token Dai crypto also offers a wide range of possible use cases on Ethereum, including the creation of smart contracts. Learn more about the value of Dai and the opportunities it may present for investors.

    How Does DAI Crypto Work?

    To understand Dai crypto, it might help to start with a brief explanation of the Maker protocol. The MakerDAO is built on the Ethereum platform, and it uses blockchain technology and smart contract capabilities to make borrowing and lending cryptocurrencies easier and less risky. The protocol accomplishes this in two ways.

    MakerDAO takes the smart contract concept to the next level, enabling the entire network to run autonomously, meaning that oversight or verification from a central authority isn’t necessary. This has enabled MakerDAO to create an innovative solution for lending and borrowing crypto via MKR crypto and its crypto-collateralized stablecoin Dai (DAI).

    What Is Dai Coin and How Does It Work?

    Dai (DAI) is a collateral-backed cryptocurrency, one that attempts to maintain roughly a one-to-one value with the U.S. dollar through the use of smart contracts. In other words, Dai coin is a stablecoin. But whereas other stablecoins are run by centralized organizations that seek to keep their prices steady, DAI crypto is based on smart contracts and backed by other forms of crypto, by using collateralized debt.

    Collateralized Debt and DAI coin

    Because most cryptocurrencies can be so volatile, Dai is over-collateralized to account for those fluctuations in value. For example, users might have to deposit $200 ETH to get $100 in DAI. Then, even if the value of ETH drops by 50%, DAI is still covered.

    The creation and use of DAI crypto used to depend on something called collateralized debt positions (CDPs) on a previous version of MakerDAO. Now, you can generate DAI by opening a Maker collateral vault, and depositing Ethereum-based assets as collateral, similar to a CDP. These collateral vaults act as escrow accounts, in effect, holding the collateral until the borrowed DAI is repaid.

    The collateral you deposit must always exceed the value of the DAI you are issued. If the collateral’s value falls below the value of the DAI tokens that were issued, your collateral will be liquidated. This helps keep Dai’s value steady, as well as its peg to the U.S. dollar.

    Advantages and Disadvantages of DAI Coin

    As a stablecoin Dai offers investors some obvious advantages compared with more volatile types of crypto, but it’s important to weigh the pros and cons.

    Advantages

    First, Dai is one of the largest stablecoins by market cap, so its trading volume is high and its value is relatively steady. This makes Dai useful for crypto lending purposes, as executing loans between two highly volatile crypto can be challenging.

    Also, as an ERC20 token, Dai is transparent and secure, and can be easily transferred within the Ethereum network.

    Because Dai is decentralized and lives on Ethereum, it does not require any account setup or KYC processes, and it’s possibly the most private stablecoin.

    Disadvantages

    Although Dai is a stablecoin and there are some advantages to the fact that it’s not fiat-collateralized, relying on other types of crypto as collateral can still be volatile. This may account for the fact that Dai has, at times, surged above or fallen well below the $1 mark.

    Unlike some other stablecoins, Dai doesn’t have as many trading pairs and isn’t offered on as many of the major crypto exchanges. In that sense it can have lower liquidity compared with other types of crypto.

    Advantages

    Disadvantages

    • Offers a consistent value, and helps to stabilize crypto loans.

    • Because it’s crypto-collateralized Dai can fluctuate.

    • Transparent, secure, and transferable within the Ethereum ecosystem.

    • Lacks liquidity (fewer trading pairs).

    • Offers more privacy, as no KYC identification required.

    Who Created Dai (DAI)?

    Dai’s history goes back to 2014. That year, the Maker Foundation was established by Rune Christensen, and the Maker Foundation created the Maker Protocol, an open-source project whose goal was to operate a credit system that would allow users to take out loans collateralized by cryptocurrencies. Dai officially launched on the Maker Protocol as a means to provide a non-volatile lending asset for businesses and individuals.

    The first white paper describing the Dai Stablecoin System was published in December 2017 (at the time, DAI was called “SAI”), and it was launched soon after with the goal of providing users with a crypto asset that lacked the volatility of other cryptos.

    In 2021 the Maker Foundation gave up governance of DAI’s backing software to MakerDAO, which now governs it.

    Why Does DAI Coin Have Value?

    Stablecoins like Dai can offer traders a tool for avoiding the volatility of other crypto whose prices are determined by market forces. So, a trader could reduce their exposure to a BTC or XRP price drop, for example, by moving value to DAI. (That said, traders can also lose out on gains as well.)

    Another value-add for this stablecoin is that it can remove some of the friction and fees of trading with traditional fiat currencies, which typically need to be processed by banks and other institutions.

    Price of Dai (DAI)

    Since its launch in 2017, Dai has been worth more or less $1 — with some stretches of volatility. For instance, shortly after launching, DAI’s value dropped to $0.72 in January 2018. It then swung back up for an all-time high of $1.37 in February 2018. Since then, though, DAI crypto has been worth about $1, with few exceptions.

    Dai is the 19th largest crypto, as of March 17, 2022. It has a market cap of $9.87 billion, with 9.87 DAI coin in circulation.

    DAI price history 2021

    Why Use DAI?

    As noted above, Dai streamlines the loan process for borrowers. There’s no need to go through a lengthy credit-approval process; Dai users can simply deposit ETH and get DAI. And while repayment requires an additional fee, it’s typically lower compared with standard banking industry rates.

    The price stability provided by DAI has also motivated investors to view DAI as not only a store of long-term value, but also a stable option for day-to-day transactions. In short, DAI has become a powerful digital asset in the blockchain ecosystem and can be used in decentralized finance (DeFi) applications or in blockchain-based games, among other things.

    How Can I Buy DAI?

    You may have to do a little research to find platforms that enable DAI trades. Also, be sure to review how crypto exchanges work, as well as any fees that may apply.

    Step 1. Choose an exchange and fund your account.

    Set up a crypto trading account and then fund your account with a secure wire transfer from your bank, or even with a credit or debit card transfer (but check with your bank in the case of restrictions). Fees may apply.

    Step 2. Set up a wallet to store your assets.

    Just as you might keep money in a physical wallet, cryptocurrencies are held in digital “wallets.” Be sure to select a crypto wallet that supports DAI.

    Note that some crypto exchange accounts come with a custodial wallet, and there may be restrictions about moving your crypto off-platform.

    Step 3. Trade DAI!

    Once you’ve executed the trade, you can transfer your holdings to your wallet. You may want to leave your holdings there if you plan to keep trading.

    Sharing Personal Data

    Depending on where you choose to trade your crypto, different platforms may require different forms of identification. Some exchanges adhere to Know Your Customer (KYC) rules, a common set of standards that require investors to disclose certain information. Others may allow anonymous or P2P transactions.

    Associated Costs

    Similar to trading securities, there are crypto fees to consider when trading cryptocurrency. Be sure to understand the associated costs that may come with trading crypto on one platform versus another, or using one form of payment versus another.

    How to Sell DAI

    Once you’ve decided to sell your DAI, the next step is deciding whether you plan to cash out for a fiat currency like U.S. dollars (USD) or trade another type of crypto.

    Step 1. Set up your trade.

    If you’re exchanging DAI for USD, the steps may be different than if you’re buying another form of crypto.

    Step 2. Find the best price.

    Crypto prices fluctuate by the minute, so do your research beforehand so you know a good offer when you see one.

    Step 3. Sell DAI.

    Complete the trade and move your crypto (or cash) to your wallet, unless you plan to keep trading.

    Step 4. Don’t forget about taxes.

    Remember that crypto gains are subject to taxes. Be sure to consider the tax implications of selling DAI coin, and consult a professional as needed.

    Does DAI Have Staking?

    Yes. Dai, like many other cryptos, can be staked to earn rewards. Staking Dai can be done through an exchange or brokerages that offer the service (you’ll need to check to see if your preferred exchange gives you the option), which is perhaps the most common way traders and investors stake coins.

    Dai can also be staked directly through the MakerDAO system via the DAI Savings Rate (DSR) protocol. Essentially, the DSR determines the rate of “interest,” or DAI rewards, accrued by locking up DAI holdings in a smart contract. The DSR does vary, but it allows holders to stake, or earn additional rewards, automatically while retaining control of their holdings.

    Staking DAI through the MakerDAO system can be done via its app, Oasis. Another important note: DAI is not mined, like Bitcoin, Ethereum, and many other cryptos.

    The Takeaway

    DAI is a stablecoin that is soft-pegged to the U.S. dollar — meaning, it’s not backed 1:1 by dollars, but rather by locking up other crypto assets as collateral. This means that unlike other fiat-backed stablecoin cryptos, typically issued by for-profit companies, Dai is based on an open-source software called the Maker Protocol, a decentralized application running on top of the Ethereum blockchain.

    As such, it’s designed to be non-volatile, while also giving users more transparency, and offering a decentralized alternative to USD, which has made it valuable for crypto lending.

    Users may find Dai appealing because it offers some of the efficiency and transparency of cryptocurrency, yet still offering some protection from price volatility.

    Dai, like many other cryptocurrencies, is borderless, programmable and easy to transfer, and it has the added bonus of offering a stable price.

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