Stablecoins are undoubtedly well known in the crypto market. It is a blockchain-based digital currency with a stable value. Stablecoins are valued against another stable asset, such as fiat currency (USD, EUR, VND). Stablecoins are seen as a possible alternative to established payment systems. The values of cryptocurrencies, especially those of Bitcoin, currently fluctuate daily. Stablecoins, on the other hand, guarantee a constant and global price, regardless of the presence of a central bank. Among them are important coins such as USDT, BUSD, USDC and DAI. DAI Coin, on the other hand, works differently than other stablecoins.
The Dai token is currently one of the most important stablecoins. This article will give you more insight about Dai Stablecoin, including what it is, how it works, who invented it, where to get it, and more.
What is AID?
Rune Christensen, CEO and Founder of MakerDAO, first announced the project in 2015, and the Maker Protocol, which underpins the DAI stablecoin, was unveiled in December 2017.
MakerDAO ‘s DAI model is distinct from those of other popular stablecoins. DAI, for starters, has an unprecedented level of decentralization. While stablecoins such as tether (USDT) provide cryptocurrency backed by a pool of fiat assets maintained by a central institution, DAI Coin is not issued by any single authority. Instead, those interested in holding DAI Coin must deposit Ethereum-based assets into a smart contract that uses them as security to keep DAI pegged to the US dollar.
Second, unlike other stablecoins, which are backed by a single fiat currency or cryptocurrency, DAI Coin can be backed by a variety of cryptocurrencies, including ETH, BAT, wBTC, USDC, COMP, and others. At the time of its conception, the Maker Protocol only accepted ether as collateral. The technology was modified in November 2019 to accommodate BAT and USDC, resulting in today’s multi-collateral DAI system. The increasing amount of collateralizable currencies reduces user risk and improves DAI’s price stability. The MakerDAO community continues to introduce new warranty options by voting.
Third, DAI token holders receive interest on their DAI. MakerDao’s native governance token, MKR, is used to establish the DAI Savings Rate (DSR) and functions as a guarantor for DAI, meaning their MKR tokens can be liquidated if the system goes down. This arrangement incentivizes the guarantors to ensure the proper functioning of the DAI system and its guaranteed tokens.
How do DAI tokens work?
DAI is an ERC-20 token that can be purchased on centralized and decentralized exchanges (DEX). Additionally, using MakerDAO’s Oasis Borrow platform, you can produce and borrow DAI Coin by opening a Maker Collateral Vault and submitting Ethereum-based assets as collateral. Maker Collateral Vaults, also known as Collateralized Debt Positions (CDPs) in an earlier version of the Maker Protocol, are smart contracts that store collateral on deposit until the borrowed DAI Coin is repaid. The value of the collateral you provide must always be greater than the value of the DAI Coin you obtain. Your warranty will be liquidated if the warranty amount falls below the price of the issued DAI parts.
Characteristics of the Dai
Dai as a store of value
A store of value is an asset that retains its value over time without depreciating significantly. Dai being a stablecoin indicates that it can be used as a storage of wealth even when the market is volatile.
Dai as medium of exchange
A medium of exchange is something that represents a measure of value and is used to encourage the sale, purchase, or exchange of services or goods. The Dai stablecoin is used for a variety of transactions around the world.
Dai as unit of account
A unit of account is a defined method for determining the value of products and services. Dai’s current price target is 1 USD. Although Dai is not widely used as a unit of currency in the off-chain world, it is a measure of value in the Maker Protocol and several blockchain dapps, with reports and fees for dapp operations in DAI at instead of USD.
Dai as deferred payment standard
Under the Maker Protocol, Dai is used to pay off debts (for example, users use Dai to pay stability fees and close their vaults). This feature sets Dai apart from other stablecoins.
Dai is created, supported and maintained by collateral assets stored in Maker Vaults on the Maker Protocol. The owners of MKR have chosen to accept a digital asset as collateral in the protocol.
How to Generate Dai Stablecoin?
DAI is unique in that it was not founded by a single person or a small group of co-founders. The MakerDAO and Maker Protocol are in charge of both the evolution of the program and the issuance of new coins.
MakerDAO is a Decentralized Autonomous Organization, which is a kind of decentralized enterprise that operates through smart contracts, which are self-executing contracts expressed in programming code and run on the Ethereum blockchain. MakerDAO was established in 2015 by a Danish entrepreneur named Rune Christensen.
Maker Governance Token (MKR) holders can vote on critical issues impacting the development of MakerDAO, Maker Protocol, and DAI, with their voting power proportional to the number of Maker Tokens they own.
The Maker protocol, based on the Ethereum blockchain, allows users to create their own currency. The Dai stablecoin, Maker Collateral Vaults, oracles, and voting are all currently part of the Maker Protocol. MakerDAO administers the Maker Protocol by voting on critical parameters (such as stability fees, collateral types/rates, etc.) using the voting power of MKR holders .
From a technical standpoint, they all focus on margin trading using ETH in Collateralized Debt ( CDP ) and Maker Vaults positions .
What is a secured debt position?
The position generated by locking the collateral in MakerDAO’s smart contract to generate its decentralized stablecoin, DAI, is known as the collateralized debt position. The MakerDAO team brought this technique to the decentralized finance industry, and this is how their decentralized stablecoin DAI is formed.
Collateral locked in a CDP must always be worth more than 150% of the DAI it was used to produce. If a position is under-collateralized, the smart contract assets are sold to cover the DAI earned, a 13% liquidation penalty, and stability fees (currently at 8.5% per annum). The DAI generated is essentially a decentralized loan secured by the value of the collateral; in order to unlock the guarantee, a user must repay the DAI plus the stability fee. Each of the DAI stablecoins are currently in use.
What are Maker Vaults?
Maker Vaults are smart contracts that can be used to make Dai from any collateral investment approved in the Maker Protocol. Individuals can join the Maker Protocol and create vaults through a variety of user interfaces (i.e. network access portals), such as Oasis Borrow and other community-created interfaces . Creating a vault is simple, but generating Dai involves a commitment to return the Dai, as well as a stability fee, in order to access collateral mobilized and locked in the vault.
Users communicate directly with Vaults and the Maker protocol, and each user has full and independent authority over their collateral placed as long as the value of the collateral does not fall below the minimum necessary level.
How to generate DAI from Marker DAO & Marker Protocol via CDP?
- Step 1: To request CDP development, you submit a transaction to the MakerDAO system.
- Step 2: To borrow the relevant DAI number, mortgage property (an amount of property you want). Now that our assets have been entered into the system, CDP will hold and block them until the loan is repaid. Keep in mind that collateral locked in a CDP must always be worth more than 150% of the DAI it was used to produce.
- Step 3: You need to send another transaction to the network to request the amount of DAI you want (corresponding to the collateral amount)
- Step 4: If you want your collateral returned, you must return the initial borrowed DAI amount to MakerDAO, along with a portion of the stability charge, this is determined by how long you borrowed DAI from the system. You can pay with MKR or DAI.
- Step 5: The CDP of the person who requested it will be returned to them, and their collateral will be opened. They now have full authority over the CDP and can withdraw all or part of the collateral.
Benefits and Use Cases of DAI
No Minimum Account Balance: Many people around the world do not have the minimum assets required to open a bank account, but DAI does not have a minimum balance requirement.
Stable Value: DAI can provide residents living in areas of extreme economic volatility with a stable alternative currency and a means of financial inclusion.
Decentralized freedom: DAI’s decentralized freedom aims to ensure that users have greater unrestricted access to their own resources, as it is a transparent, permissionless network.
Income Generation: Users can use their DAI tokens to create money through locking and generating interest using the DAI savings rate system. DAI does not have its own staking process as it is built on the Ethereum blockchain and therefore uses the network’s own consensus mechanism. Owners of DAI tokens, on the other hand, can earn revenue by putting DAI into a MakerDAO smart contract. The user’s investment, which has no minimum and can be withdrawn at any time, is secured with this specific smart contract technology.
Fast and Cheap: International bank transfer fees can be prohibitively high in many cases, and the time it takes to make a transfer can be quite inconvenient. Global transfers from one user wallet to another become dramatically more seamless and efficient thanks to DAI’s low transfer costs and fast processing times.
Always accessible: Traditional financial institutions are only open during normal business hours. Therefore, transactions made through these institutions can take days and will only be completed once the financial institutions are open and transfers have been made. However, thanks to DAI and the Ethereum blockchain, transactions can be completed in minutes at any time and any day of the year.
Highly Secure: The MakerDAO system is known to perform extensive reviews and research to ensure the robust security of the platform. Developers formally verify all smart contracts and underlying protocol techniques that make up the internal structure of the system using mathematical analysis. Before using a DeFi protocol, always do your own research (DYOR) and understand the dangers.
Should you buy DAI Coin?
Due to its relationship with the US dollar, one of the main advantages of DAI is that it offers the transactional advantages of a cryptocurrency with little volatility. DAI is an ERC-20 currency that was created with the Ethereum blockchain in mind.
DAI can be purchased directly on conventional cryptocurrency exchanges or decentralized exchanges (DEX). You can also borrow DAI using the Maker protocol by pledging Ethereum-based products as collateral to secure the amount of DAI borrowed. To ensure network liquidity, DAI needs a larger collateral investment than the amount of DAI borrowed. Collateral may be withdrawn if the value of your crypto-collateral falls below the value of the issued DAI tokens. However, if the value of your collateral increases, your DAI borrowing limit increases proportionally. The Maker Protocol works similarly to an escrow account, where collateral is held until the lent DAI and processing fees are repaid.
Another advantage of DAI is its good integration into the Ethereum network. Once acquired or borrowed, DAI can be used in a variety of decentralized applications, including:
- Decentralized Finance ( DeFi )
- Non-Fungible Tokens ( NFTs )
MakerDAO is striving to make DAI the “world’s first unbiased currency”, and it starts with the logo, which it hopes will be as well known as the symbols for dollar ($), euro (€ ) and the pound sterling (£).
DAI will need to be adopted and used by millions of people in order to become the first consumer trustless currency – a mission that will include not only branding, but also marketing and education. No other stablecoin is better positioned to make this happen, despite it being a difficult process.