Dai (DAI)

DAI is the first decentralized, collateral-backed stablecoin.

It is a cryptocurrency that attempts to maintain a 1:1 stable value with the U.S. dollar by locking other crypto assets in smart contracts.

What is DAI?

DAI is a cryptocurrency that aims to maintain a stable value of one US dollar.

Unlike Bitcoin or Ethereum, which can fluctuate wildly in price, DAI is designed to stay relatively constant. This makes it useful for things like payments, savings, and lending, where price stability is important.

What sets DAI apart from other stablecoins like Tether (USDT) or USD Coin (USDC) is that it’s decentralized and backed by collateral.

This means that no single entity controls DAI, and its value is derived from the underlying crypto assets locked in smart contracts. DAI is also an ERC-20 token, meaning it operates on the Ethereum blockchain.

Unlike other asset-backed cryptocurrencies typically issued by actual companies, DAI is a product of open-source software called Maker Protocol, a decentralized autonomous ecosystem of smart contracts running on the Ethereum blockchain.

The Maker Protocol uses these smart contracts to manage the supply of DAI and keep its price pegged to the dollar.

Governance of the entire Maker Protocol (and subsequently DAI) falls under MakerDAO, a decentralized autonomous organization of international participants.

Team Background

The Maker Protocol was created by the Maker Foundation, which was founded in 2014 by Rune Christensen.

He studied International Business at the Copenhagen Business School and co-founded Try China, a company providing international recruiting.

The goal of the open-source project was to run a credit system that allows users to secure loans collateralized by crypto assets.

In 2017, DAI was officially launched on the Maker Protocol as a means of providing a non-volatile (read: stable) lending asset for businesses and individuals.

The Maker Foundation eventually turned over the control of the protocol to MakerDAO, which is the decentralized autonomous organization made up of members who hold the governance token, MKR.

How does DAI work?

Imagine a system where you can deposit your cryptocurrencies, like ETH, as collateral and borrow DAI against it. That’s essentially how DAI is created.

To generate DAI, users deposit collateral assets into Maker Vaults. These deposits, valued in USD, create an equivalent amount of DAI.

To ensure the system remains stable, DAI is overcollateralized. This means that the value of the collateral is always higher than the amount of DAI borrowed.

The typical collateral-to-loan ratio is 66%, meaning you need to deposit $150 worth of crypto to borrow 100 DAI.

If the value of the collateral falls below a certain threshold, the system automatically liquidates it to maintain the peg to the dollar.

Here’s a step-by-step breakdown of how DAI works:

  1. Deposit Collateral: Users deposit crypto assets (like ETH) into a Maker Vault.
  2. Generate DAI: The Maker Protocol generates DAI based on the value of the deposited collateral.
  3. Maintain the Peg: The Target Rate Feedback Mechanism (TRFM) adjusts the stability fee to incentivize borrowing or repayment of DAI, thus controlling its supply and price. If DAI’s value rises above $1, the TRFM increases the stability fee, making it more expensive to borrow DAI and encouraging users to repay their loans, reducing the DAI supply. Conversely, if DAI’s value falls below $1, the TRFM lowers the stability fee, making it cheaper to borrow and increasing the DAI supply

DAI is created or borrowed when a user deposits collateral to the protocol and burned when a user repays the DAI back to the protocol for their collateral.

If a borrower is unable to pay the loan back, the Maker Protocol will take the collateralized assets like ETH and sell them using an internal market-based auction mechanism.

The supply of DAI is maintained through a system of smart contracts designed to respond to changes in the market price of the crypto assets locked up.

One of the key uses of DAI is to provide liquidity for various DeFi apps such as decentralized exchanges and borrowing/lending protocols.

Holders of DAI are incentivized to lock up their tokens in liquidity pools with a portion of the trading fees earned when traders use the pool to swap tokens.

Another key use case is that just like almost any other stablecoin, traders would often swap other assets to DAI to avoid extreme volatility environments without leaving the crypto asset space.

And finally, like other stablecoins, DAI transactions settle quickly relative to the traditional financial system, and many times with lower transaction costs.

Unlike other stablecoins such as USDT and USDC, whose issuance and regulation are controlled by governing companies, DAI is governed by smart contracts and the MakerDAO.

No one person or legal authority has the ability to interfere with DAI coins or addresses, making it a truly decentralized stable asset.

How is DAI Used?

DAI has a variety of use cases, making it a versatile tool in the crypto world. Here are a few examples:

  • Payments: Since DAI’s value is stable, it can be used for everyday transactions without worrying about price fluctuations. For example, some businesses are beginning to accept DAI as a form of payment.
  • Savings: You can earn interest on your DAI holdings through various DeFi platforms and the Dai Savings Rate (DSR). This provides a way to earn passive income on your crypto assets. Imagine earning a stable interest rate on your savings without having to rely on a traditional bank.
  • Lending: DAI can be used as collateral for loans, allowing you to access liquidity without selling your other cryptocurrencies. For instance, you could use your ETH as collateral to borrow DAI, which you could then use to buy more crypto or even cover expenses in your local currency.
  • Decentralized Finance (DeFi): DAI plays a crucial role in the DeFi ecosystem, powering various applications like decentralized exchanges and lending platforms.

Advantages and Disadvantages of DAI

Like any cryptocurrency, DAI has its own set of advantages and disadvantages:

Advantage Disadvantage
Decentralization: DAI is not controlled by a central authority, providing transparency and censorship resistance. Complexity: The underlying mechanisms of DAI can be complex for beginners to understand.
Accessibility: Anyone with an internet connection can access and use DAI. Collateral Risk: The value of the collateral backing DAI can fluctuate, potentially impacting its stability.
Security: The Maker Protocol is regularly audited to ensure its security and stability. Limited Liquidity: Compared to some centralized stablecoins, DAI may have lower liquidity, making it harder to buy or sell large amounts quickly.
Stability: DAI offers price stability, making it suitable for payments and savings. DAI is one of the most stable stablecoins.

Token Metrics:

  • Holder Addresses:
    • Ethereum: Approximately 506,291 unique addresses.
    • Polygon: Approximately 1,653,079 unique addresses.
    • Optimism: Approximately 130,425 unique addresses.
  • Circulating Supply: Approximately 5.37 billion DAI.

Rebranding to Sky

In August 2024, MakerDAO rebranded itself as “Sky” as part of its “Endgame” plan. This initiative introduced new tokens:

  • USDS: A new stablecoin, with DAI holders given the option to upgrade to USDS at a 1:1 ratio.
  • SKY: A new governance token, allowing MKR holders to convert their tokens to SKY at a 1:24,000 ratio.

Despite the introduction of these new tokens, DAI and MKR remain in circulation, providing users with the flexibility to choose between the original and new tokens.

Token Migration Plans:

In December 2024, Christensen announced plans to expedite the full migration from MKR to SKY tokens in 2025.

The objective is to phase out MKR, making it a legacy wrapper representing 24,000 SKY per MKR, thereby streamlining the token ecosystem.

Introduction of SubDAOs (Stars):

As part of the Endgame plan, Sky intends to launch additional SubDAOs, referred to as “Stars,” in 2025.

These entities aim to operate independently within the Sky ecosystem, fostering innovation and decentralization.