Central banks and governments are still trying to figure out how to regulate cryptocurrencies. It’s no secret that their volatility makes them unreliable for making everyday purchases, but the blockchain ensures that people can trust in their transactional security. MakerDao is a new company who is building a stablecoin on top of Ethereum called DAI. DAI is a decentralized cryptocurrency that illuminates the future of cryptocoin transactions. This beginner’s guide will teach you how to invest in MakerDAO and how DAI works so you can make the most of your money.
In this review, we will explain everything in detail about DAI, one of several stablecoins. The DAI structure indicates that it is a trustless and decentralized stablecoin which has been adopted and used worldwide. The question is, why is DAI different from others?
DAI is not the first stablecoin on the market. For instance, Tether is among the oldest and largest stablecoins. Others include Demini Coin, USDC, PAX, and even the upcoming stablecoin from Facebook named Diem.
DAI has upended the status quo, and we will explore its concept, process, and operations in this article to give you a better understanding of stablecoins.
Understanding the DAI Stablecoin
One of the ERC20 tokens, DAI is issued through smart contract mechanisms on the Ethereum Blockchain with a value of 1 US dollar (USD). It is maintained and governed by a decentralized autonomous organization (DAO).
Making DAI on MakerDAO involves taking out a loan on the platform. Making DAI is what users of MakerDAO borrow and pay back when the time comes.
Since its creation in 2013, DAI has seen steady growth in both market capitalization and usage. It was founded by Rune Christensen, the current CEO.
With a new DAI, users can pay or even transfer from one Ethereum wallet to another, as it becomes a stable Ethereum token.
DAI Stablecoin: Explained
Each DAI is valued at 1 USD, unlike other stable coins that rely on collateral held by a company, so it is not controlled by a company. Instead, it uses a smart contract to handle the entirety of the process.
(Collateralized Debt Position) CDPs are opened with Maker, and the user deposits Ethereum or another cryptocurrency. Based on the ratio, Dai is earned in return.
During the initial deposit process, the Etherium can be claimed back as part of or all of the Dai earned. The ratio that determines the Etherium amount also permits the Dai price to remain about 1 USD.
If a user wants to skip the first stage, he or she can purchase Dai on any exchange and know that it will be worth close to $1 in the future.
How Is MakerDao’s DAI Stablecoin Different from the other Crypto Stablecoins?
Over the years, Cryptocurrencies with steady value have been in existence, such as Tether, USDC, PAX, Gemini coin, etc. They all compete to become the most desired stable cryptocurrency, but one needs to trust another to keep dollars in the bank. DAI is different.
Whenever a loan is taken out on Maker DAO, Dai tokens are created, which function as stable Ethereum tokens that can be easily transfered between Ethereum wallets and used for other purposes.
Dai is a stable coin that can be created from a variety of crypto assets. It is technically an updated version of the stable coin called multi-collateral Dai. In addition to ETH, Basic Attention System (BAT) is also accepted. Moreover, the old version of the system, Single-collateral Dai, can only be created with ETH collateral.
Maker DAO’s algorithms automatically manage the price of Dai.There is no need to trust one individual to keep Dai stable. A price fluctuation of Dai away from the dollar leads to the burning or creation of Maker (MKR) tokens to stabilize the price.
When the system works as intended, the DAI price stabilizes, in this case, MKR will become rarer and more valuable, so MKR holders benefit from the price stability. Dai’s price of one dollar has remained stable for the last three years.
The Dai token serves as a pillar that can be integrated into any decentralized application (dapp) that requires a stable payment system, since it is simply a token on Ethereum.
Different smart contracts include Dai and modify it for different purposes. For example, xDAI, a transfer and payment system for super-fast and very low-cost sidechains. By using a normal DAI to design an interest-generating pool, rDAI and Chai allow users to control what happens to the interest as it accumulates.
Benefits of Using The Dai Crypto Coins
No one can overemphasize the benefits and uses of Dai Crypto, which is known to be a stable market. However, below are some highlights of the major ones:
- Low-cost Remittance
This may be one of the reasons the crypto industry is increasingly adopting DAI. By using this stable coin, you can pay your debts, buy goods and services, and even send money overseas. The good news is that all of these transactions are fast, convenient, and inexpensive.
When you use the conventional financial systems, you will incur more costs, experience unnecessary and annoying delays, and sometimes even have your payment cancelled. For example, if you were to do a cross-border transaction through Bank of America and Western Union, you’d have to spend at least $45 and $9, respectively.
This is not so when going through Maker Protocol. As a result, you can send money to a person in another country within seconds at a small gas fee. The system runs on the trustless blockchain and supports peer-to-peer transfers.
- Good means of savings
By locking the Dai stable coin into a special smart contract, members can earn the Dai Savings Rate (DSR). In addition, there is no cost, no minimum deposit, no geographical restrictions, and no liquidity restrictions. Parts or all of Dai Locked can be withdrawn at any time.
In addition to a paddle to financial freedom, the Dai Savings Rate adds a game-changer to the Defi movement with its access to Oasis save and other DSR projects, including OKEx Market Place and Agent wallet.
- Brings Transparency to Financial Operations
The traditional system has the annoying aspect that people don’t know what happens to their money. They don’t understand the inner workings of the system, and no one bothers to tell them.
However, on MakerDAO, users get insights into every single event that takes place on the platform, including both DAI and DSR.
Additionally, blockchain transactions are transparent, as everything is kept on the public ledger, which anyone can see. Thus, with the built-in checks and balances on the chain, users know exactly what is going on.
In addition, the audited and verified smart contracts on the Maker protocol are accessible to technical users. If your technical skills are advanced, you can even look at these contracts to understand how they work.
It is clear that our conventional financial systems cannot allow such high levels of access or information to reach their customers.
- Money Generating
The Maker Protocol allows users to generate Dai daily from surplus collateral by locking it in Maker vaults. The amount of Dai a user generates is strictly based on the amount of collateral locked on the system.
Many people do this to acquire more ETH with the turnover because they believe the price of ETH will rise in the future. Some business owners do this to generate more capital, hedge their funds against crypto’s volatility, but lock their funds in Blockchain.
- Drives its Ecosystem and Decentralized Finance
As more and more projects recognize stablecoin and start using its features, DAI will gain credence and global adoption.
DAI provides developers with a stable asset for their respective platforms. In this way, risk-averse individuals are able to participate more in the crypto space. As the user base grows, Maker Protocol will provide a stable asset for transactions.
It also helps users generate passive income, measure collateral, and transact easily, since DAI is one of the foundational holders of decentralized finance. Defi will also continue to grow if more individuals adopt DAI.
- Financial independence
Several countries with high inflation rates have routinely placed restrictions on capital flows, including withdrawal limits that affect their citizens.For such people, Dai is a good alternative since one Dai is equivalent to a US dollar, and it can be exchanged peer-to-peer without interference from the Bank or a third party.
By using the Maker protocol, anyone who deposits collateral in MakerDAO’s vault can create Dai, use it in payments, or earn Dai Savings Rate. You can also trade Dai on popular cryptocurrency exchanges and Oasis without interference from a central bank or third party.
- Provides Stability
Given that crypto prices and values fluctuate without warning, it is refreshing to have some stability in an otherwise chaotic market. That’s what DAI brings to the market.
Tokens are pegged to USD with strong collateral locked in the Maker vaults. Users can store DAI during periods of high market volatility without leaving the game.
- Round the Clock Service
The conventional methods of financial services and DAI differ in this aspect. With conventional methods, you have to wait until the set schedules of operations are met before realizing your financial goals.
Furthermore, if you use other outlets provided by your bank, such as the ATM machine or mobile and desktop app, to transact during the weekend, you’ll still need to wait until the next business day. But DAI changes all that. Users can complete all transactions on DAI without restrictions or schedules. The service is accessible 24/7.
As a result, DAI is run by no centralized authority that controls how users can use it. Users can generate the token, use it and pay for services or goods from anywhere at any time according to their schedule.
DAI and DeFi
DAI is also recognized for its prominence and importance in the ecosystem as a result of the global adoption of Decentralized Finance in 2020.
One of the most important aspects of DeFi is its stablecoin because it facilitates operations in the projects that come from it. If DeFi projects must exist on the Maker protocol and Ethereum, then there must also be a stablecoin.If any of the DeFi projects do not provide adequate liquidity, which ensures continuous transactions, then no one will use it. This means the DeFi project will fail disastrously.
There are many reasons why liquidity pools are crucial to the decentralized finance ecosystem. With these pools, people believe more in projects, even if their user base is small. Shared liquidity increases trading volumes, which makes the ecosystem more attractive to more people.
Additionally, shared liquidity helps DeFi projects to focus more on customer satisfaction, which gives them the ability to scale their projects. This is why DAI’s shared liquidity has become a significant boost for DeFi projects.
Furthermore, DAI brings stability to DeFi projects. As a stablecoin, it facilitates lending, borrowing, and investing across different decentralized applications.
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Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
