What is DAI?

DAI is the first collateral-backed cryptocurrency that aims to keep its value pegged to the U.S. dollar at all times. It does this by tying other cryptocurrencies into contracts.

This cryptocurrency is a byproduct of an open-source project called the Maker Protocol, a blockchain-based decentralized platform. The Maker Protocol uses a smart contract built on the Ethereum blockchain to secure loans. They, in turn, get new DAI tokens.

The value of this token is backed by Ether (ETH) rather than dollars stored by a bank.

The platform’s lending service allows borrowers to secure a loan using their assets. Lenders can take the collateral and sell it if the borrower defaults. Hence, the interest rate on secured loans has historically been lower than on unsecured loans.

Borrowers who want their locked ETH back must give the protocol the DAI and pay a fee. If they fail to pay back, the Maker Protocol will seize the collateral and auction it off in an internal market-based auction.

Who Created DAI?

Rune Christensen created MakerDAO and serves as CEO of the Maker Foundation, both of which are crucial to the Maker protocol’s ecosystem. He spent years at the University of Copenhagen and Copenhagen Business School diving into the world of cryptocurrencies. During this period, he started a company that employed Westerners to teach English in China.

When he learned about Bitcoin in 2011, he decided to sell his company and put his money into this digital currency. Christensen became intrigued by stablecoins after the 2014 hack and subsequent collapse of Mt. Gox.

In 2015, Christensen established MakerDAO to bring a better and more transparent financial system to the globe. Maker started as one of the first Ethereum protocols and has since grown to become the largest.

How Does DAI Work?

DAI is an asset in the cryptocurrency market that is collateralized by a pool of other cryptocurrencies. Users can use ETH to buy this crypto coin on an exchange at a rate of one DAI to one dollar. Alternatively, they can use the Maker Protocol to collateralize ETH and other assets to buy this crypto coin.

This second method is called over-collateralization. Over-collateralization occurs when the required deposit amount is higher than the value of the DAI deposited. This is done to account for the inherent instability of crypto collateral.

To compensate for the potential decline in the value of ETH, customers must spend $200 in ETH to purchase $100 in DAI. Therefore, even if the value of ETH drops by 25%, the $100 DAI will still be backed by $150 ETH.

To retrieve the deposited ETH, the user must return the DAI and pay a stability fee.

Is DAI a Good Investment?

One of the most appealing features of this cryptocurrency is that it offers the transactional advantages of a cryptocurrency with less volatility. It’s all an advantage of its relationship with the U.S. dollar. DAI was developed as an ERC-20 token for the Ethereum network.

The Ethereum Request for Comment (ERC), a set of standards adopted in 2015, facilitates the creation of smart contracts on the Ethereum network and reduces the associated development time. DAI may be used in several decentralized software systems (DApps) when borrowed or purchased. It is also helpful in the realms of gaming, decentralized finance (DeFi), and non-fungible coins (NFTs).