Learn more about DAI, an unbiased hybrid stablecoin

ProductOct 27, 2022
Learn more about DAI, an unbiased hybrid stablecoin

DAI emerged as an asset for crypto loans and a hedge against price swings. Unlike Tether or USD Coin, it is issued by open-source software. DAI crypto is neither purely algorithmic nor fiat-backed. Here are the main things to know about one of the key stablecoins in DeFi.

What is DAI crypto?

Dai (DAI) is an ERC-20 token launched by MakerDAO, a prominent contributor to decentralized finance, in 2017. This DeFi lending protocol was developed by the Maker Foundation. Using Ethereum's smart contracts, it replicates conventional finance without intermediaries like banks.

DAI is promoted as "the world's first user-created, unbiased currency and leading decentralized, asset-backed stablecoin." Its value, designed to match USD, once entirely relied on ether. In November 2019, the Maker Protocol transitioned to a multi-collateral system that now includes 20+ cryptocurrencies and stablecoins. The sheer range of collateralizable assets mitigates user risk.

The Maker Foundation coordinates the MakerDAO ecosystem through decentralized governance powered by MKR tokens. In addition, Dai Foundation, a Denmark-based non-profit, provides custody for trademarks and other intellectual property — an additional, although partly centralized, layer of security.

What is DAI backed by?

DAI is a hybrid algorithmic stablecoin backed by over 20 stablecoins and cryptocurrencies. The MakerDAO community continues adding more DAI collateral options through voting. At press time, USD Coin (USDC) and PAX Dollar (USDP) provide the most collateral, followed by ether (ETH) and Wrapped Bitcoin (WBTC). Other digital assets include:

  • Basic Attention Token (BAT)
  • Compound (COMP)
  • TrueUSD (TUSD)
  • 0x (ZRX)
  • Decentraland (MANA)
  • Chainlink (LINK)
  • Gemini Dollar (GUSD)
  • Uniswap (UNI)

How does DAI work?

Aside from hybrid collateral, DAI stablecoin boasts an unprecedented level of decentralization. It was developed specially for MakerDAO, whose lending and borrowing services are powered by smart contracts, without red tape and the middle man.

  • No one entity controls the minting and burning of DAI. New tokens are generated automatically once a borrower deposits collateral into a smart contract.
  • Despite the 1:1 USD peg, DAI maintains value by locking other digital assets in contracts instead of cash or cash equivalents. It relies on collateralized debt denominated in ETH and other cryptocurrencies.

As of this writing, DAI is the 16th cryptocurrency and fourth stablecoin by market cap (just under $5.8 billion). Its capitalization matches the available supply (5.8 billion tokens). As DAI meets the ERC-20 standard, it is available on centralized and decentralized exchanges.

Comparison of stablecoin supply. Source: The Block
Comparison of stablecoin supply. Source: The Block

Minting and burning of DAI coin

Ethereum, which powers MakerDAO, is the most decentralized blockchain outside Bitcoin. This open-source protocol lets anyone mint DAI — users borrow new tokens by opening Maker collateral vaults. Here is how the Oasis Dapp works.

  • Users deposit other crypto to borrow DAI via the Oasis dashboard. These loans are always over-collateralized (the value of the collateral exceeds the loan amount), as the collateral includes volatile digital assets. Currently, Oasis Borrow supports 20+ assets.
  • A user's request for a loan generates a smart contract – a vault. It holds the collateral in escrow until the borrowed amount is returned. Meanwhile, the user receives (mints) DAI. In previous protocol versions, vaults were called collateralized debt positions (CDPs).
  • Once a user repays a DAI loan, the system releases the collateral back to their wallet. Meanwhile, the returned DAI tokens are dissolved or burned.

Advantages of DAI crypto

DAI is transparent, permissionless, and accessible to everyone. It serves as a store of value and an efficient means of payment for daily transactions. The biggest strengths include:

  • No account minimum. The MakerDAO website describes DAI as "the world's first unbiased currency" that "does not discriminate." You can start from any amount you can afford.
  • Stable value. As a stablecoin, DAI not only provides a hedge against market shocks. It allows the unbanked to transfer funds and helps residents of economically unstable countries protect their holdings from inflation.
  • Freedom of decentralized finance. DAI holders have unrestricted access to their wealth, even in countries with limitations on bank withdrawals.
  • Passive income. Thanks to the DSR mechanism, users earn DAI interest by locking up their tokens. This system is not a proprietary staking scheme — it merely leverages Ethereum's consensus. Holders deposit tokens into a MakerDAO smart contract, which allows withdrawal at any time and ensures secure investment.
  • Fast and cheap. Like other ERC-20 stablecoins, DAI supports faster and cheaper transactions compared to international wire transfers. Transactions between crypto wallets are more efficient and transparent. They are processed in minutes 24/7, on any day of the year, while conventional institutions only operate during business hours.
  • Security. MakerDAO has conducted extensive research and audits. All smart contracts and protocol mechanisms are verified through mathematical analysis.

Disadvantages of DAI coin

Like other stablecoins, DAI does not support speculative trading, as its value is relatively static. Furthermore, the crypto collateral, although diversified, is not fully immune to volatility. The number of trading pairs is fairly limited, and liquidity is generally lower than that of USDT or PAXG.

How safe is DAI?

The amount of assets backing DAI matches the size of borrowers' collateral. Unlike USDT, it is only soft-pegged (correlated) to the value of the US dollar and supports the peg through governance. Depending on the price, MRK holders vote on expanding or contracting the token supply.

  • If the DAI price rises too high, the supply is increased.
  • If the DAI price falls below the peg, the supply is decreased.

MakerDAO's native governance token supports the system's overall stability. It also protects users from the effects of extreme market conditions:

  • Instead of dealing with supply-side economics, MKR holders adjust DSR — DAI Savings Rate — to manage the demand for DAI.
  • MKR holders are guarantors for DAI: in turbulent periods, their tokens can serve as an additional liquidation source.
  • MKR holders receive an interest payment through the Oasis Dapp. This reward motivates them to support the smooth functioning of DAI.

How does DSR work?

DSR is applied to DAI deposited in a particular smart contract. This interest rate is determined by a MakerDAO vote and paid from the Stability Fee funds. Stability Fee is another interest rate — it works for all newly created (borrowed) Dai. The lower it is, the more attractive the DAI loans.

A growing DSR bolsters the demand for the stablecoin. It encourages users to swap other assets for DAI and deposit the latter in the DSR contract. Conversely, a decreasing DSR causes the demand to shrink, so more DAI is sold.

DAI applications

The DAI stablecoin supports 400 Dapps and wallets, which makes it the most popular stablecoin in the DeFi industry. It is also run separately by the Maker Foundation. DAI supports exchange, crypto lending, borrowing, and staking.

DAI crypto price

According to CoinGecko, DAI saw an all-time high of $1.22 on March 13, 2020, and an all-time low of $0.903243 on November 5, 2019. At press time, one DAI token is worth $0.999870, with a 24-hour and 7-day change of +0.1% and a 12-month shift of -0.5%.

DAI price chart. Source: CoinGecko
DAI price chart. Source: CoinGecko

The peak DAI price followed an unprecedented crash in the ETH price. To restore the peg, governing members decreased the DSR to 0%. As users started swapping DAI for other assets, the price returned to around $1.00. Since then, DAI has been stable with minor fluctuations.

DAI on CoinLoan

Get a DAI loan in seconds using other crypto as collateral — CoinLoan offers flexible conditions with an adjustable LTV. Alternatively, you can deposit the holdings from your DAI wallet for a passive income.

CoinLoan is a secure crypto environment with a zero-incident track record. Thanks to our user-friendly app, your digital portfolio is always on hand! Learn more about your options below.

DAI loans

Borrow the DAI stablecoin using PAXG, WBTC, XRP, BNB, or other cryptocurrencies as collateral. We offer a broad LTV range between 20% and 70%. Choose a period between one month and three years, or enter your preferred term for instant loans. All you need is a verified account — no paperwork, no credit checks, and no hassle!

DAI crypto interest

Keep your DAI holdings in our Interest Account to earn a competitive APY. You can upgrade the standard rate by staking CoinLoan's native tokens. Choose between:

  • 10.3% DAI APY
  • Up to 12.3% DAI APY with CLT Staking

Final word

DAI is a leading DeFi stablecoin, a hybrid asset that is unbiased and highly decentralized. Despite the absence of fiat collateral, MakerDAO mitigates risk through crypto diversification. DAI supports staking, quick loans, and deposits. Make your holdings grow on CoinLoan — borrow DAI against other assets and take advantage of our competitive APY!

Disclaimer:

The information provided by CoinLoan (“we,” “us,” or “our”) in this text is for general informational purposes only. All investment and financial opinions expressed by CoinLoan in this text are from the personal research and open information sources and are intended as educational material. All outlined information is provided in good faith. However, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information in this text.

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