What is DAI? - Reading time: about 4 minutes
In general, stablecoins are a subgroup of cryptocurrencies that have the element of stability and are less open to fluctuations in value. Unlike volatile cryptocurrencies, a key differentiating characteristic of stablecoins is that they are tied to a reserve asset such as fiat currencies (e.g., USD, EUR) or commodities like gold or oil.
Decentralized stablecoins are those backed by other crypto assets and therefore tend to be less stable than their fiat-backed counterparts due to a reliance on the value of the underlying asset.
This class of stablecoin is characterized by a high degree of decentralized control and a lack of external custodians, giving them the added benefit of enhanced transparency and liquidity.
Among all the decentralized stablecoins on the market, DAI has long remained one of the most popular due to being overcollateralized.
DAI is specifically built to maintain dollar parity similar to USD-backed stablecoins such as USDT but is not backed by a 1:1 fiat ratio as in the case of the former.
Instead, DAI utilizes a 150% over-collateralization ratio to ensure that the entire is fully backed and safe from a major flight in capital such as a bank run.
DAI is regulated by MakerDAO, a decentralized autonomous organization (DAO), built on Ethereum and is overseen by those who own the organization’s governance token, MKR.
What is MakerDAO
MakerDAO is a P2P organization on the Ethereum network that allows people, through the use of smart contracts, to lend and borrow using cryptocurrencies. The organization takes the form of a decentralized credit platform that enables users to open a vault, lock in collateral, and generate DAI as a debt against the crypto collateral.
It is the first Ethereum project to run reliable oracles which dApps use to ensure the security of their systems and to provide up-to-date price data. MakerDAO has partnered with hundreds of blockchain projects to make it a key platform in the decentralized finance (DeFi) movement and its promise of economic empowerment.
How DAI is backed
DAI tokens are generated in the form of debt denominated in Ether (ETH). Users deposit collateral assets into non-custodial Maker Vaults within the open-source software Maker Protocol on the Ethereum blockchain.
Borrowers lock ETH and other crypto assets on the protocol to collateralize it. By doing so, new DAI is minted to increase the liquidity safety net - though some users can buy DAI from exchanges or receive it as a means of payment.
It is important to note that DAI’s total supply cannot be altered by design. Its supply is managed by smart contracts that respond to changes in the market price of the assets locked in the protocol. Its circulation is backed by excess collateral and all its transactions are made public on the Ethereum blockchain.
Minted or bought DAI can then be used like any other digital asset: sent to others, to pay for goods and services, and even held in the Maker Protocol’s DAI Savings Rate (DSR) which allows users to earn on the DAI they hold while protecting their assets’ value from depreciating. The DSR can be integrated into exchanges and blockchain projects. It could attract crypto traders, market makers, and others to hold their idle assets in DAI which could be locked to earn passively.
To withdraw their ETH collateral, users must pay back the DAI loan for a fee (except in the event of liquidation when the Maker Protocol sells the collateral through an auction mechanism).
The collateralized debt is used to maintain DAI’s value and prevent liquidation cascades.
With about 1.7 billion unbanked adults around the world according to the World Bank’s 2017 Global Findex Database, DAI has been identified as favorite useful crypto for everyone with access to the internet including in Latin America.
Also, as an acceptable gas payment option in the Ethereum ecosystem, DAI’s adoption is also likely to be enhanced by decentralized apps (dApps) accepting it instead of or alongside ETH.
Centrifuge teamed up with Maker to complete the very first real asset-backed collateral for DAI and establish what was essentially a DeFi-based credit line for accessible capital.
Why DAI was founded
DAI was designed with properties that will make it serve use cases that are similar to money functions. They include its capability as a store of value that keeps its value even in a volatile market; as a medium of exchange used for transactional purposes worldwide; and as a unit of account within the Maker Protocol and on some dApps.
DAI is also a standard of deferred payment i.e. used to settle debts within the Maker Protocol which is the main advantage DAI has over other stablecoins.
Why Hold DAI
DAI is a stable, on-chain store of value with no centralized actor or trusted intermediary hence unbiased and available to anyone, anywhere.
DAI is used to access DeFi features including earning interest, borrow/lend, and more
DAI has a large addressable market potential across the entire decentralized blockchain industry and beyond
It is a hedge against devaluation
DAI enables low transaction costs including in cross-border exchanges and remittances owing to its volatility mitigation and a lack of intermediaries
DAI is accepted widely across dApps and helping to develop a more robust DeFi ecosystem
How to buy DAI on ProBit Global
1) ProBit Global users can buy DAI using a credit card by accessing the fiat-on ramp which currently supports over 40 fiat currencies.
2) DAI can also be purchased on the exchange by placing a limit order.