DAI: The Most Important Building Block In The DeFi Ecosystem

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In the burgeoning DeFi ecosystem of permissionless trading, borrowing, and lending, the stablecoin DAI is a vital building block.

DAI is an algorithmic stablecoin issued by MakerDAO, an Ethereum-based protocol, that maintains an exact dollar-to-DAI ratio.The main function of this protocol is to facilitate the lending and borrowing of crypto assets without the use of an intermediary – creating a permissionless, transparent system with minimal restrictions.

The Next Big Thing In Crypto: The MakerDAO (DAI) Stablecoin

Founder and CEO Rune Christensen introduced MakerDAO in 2015, and the Maker Protocol – the platform for the DAI stablecoin – was launched in December 2017.

MakerDAO’s model for DAI differs from other leading stablecoins. A major characteristic of DAI is its unprecedented degree of decentralization. While stablecoins such as Tether offer a cryptocurrency backed by a reserve of fiat assets controlled by a central organization, no organization controls the issuance of DAI. Instead, users looking to hold DAI deposit Ethereum assets into a smart contract that uses them as collateral to maintain DAI’s peg to the U.S. dollar.

DAI is also different from most stablecoins, which are backed by a single fiat currency or cryptocurrency, since it can be backed by different cryptocurrencies, including ETH, BAT, USDC, wBTC, COMP, and many others. As of November of this year, the Maker Protocol has been updated to include BAT and USDC as collateral, creating the multi-collateral DAI system we know today. MakerDAO users continue to vote for new collateral options, which decreases user risk and increases price stability of DAI.

Additionally, DAI token holders earn interest on their assets while holders of MKR, MakerDao’s native governance token, set the DAI Savings Rate and act as guarantors of DAI — meaning, their MKR tokens are liquidable in case the system crashes. Guarantors are therefore incentivized to ensure the smooth operation of the DAI system and its collateralized tokens.

DAI Tokens Explained

Decentralized exchanges (DEXs) as well as centralized exchanges (ECLs) offer DAI as an ERC-20 token. A Maker collateral vault can also be opened via MakerDAO’s Oasis Borrow dashboard and Ethereum-based assets be deposited as collateral for borrowing DAI. Smart contracts called Maker collateral vaults, previously known as collateralized debt positions in an earlier version of the Maker protocol, hold collateral in escrow until the borrowed DAI is returned.

The value of the collateral you deposit must always exceed the value of the DAI tokens you are issued. If your collateral is valued below the value of the tokens you are issued, you will have to liquidate it. The MakerDAO stablecoin has been available since December 2017 thanks to its underlying Maker Protocol architecture, developed by MakerDAO’s CEO and founder Rune Christensen.

The Future Potential of the DAI Stablecoin

A soft peg (or correlation) is established between the DAI and the U.S. dollar. DAI stablecoins’ increased price stability convinced investors that DAI is not just a stable store of long-term value. Blockchain technology and cryptocurrency systems as a whole have become a viable option for daily transactional purposes, which has greatly increased their utility.

Introducing DAI Stablecoin Advantages: A Revolutionary Blockchain Project

No Account Minimum: Many people around the world do not have the required assets to open a bank account, but there is no minimum balance requirement to use DAI.

Stable Value: The DAI can be used as an alternative stable currency to help provide financial inclusion to citizens living in economically unstable areas.

Decentralized Freedom: Since DAI is a transparent and permissionless system, it enables users to control their own wealth without being restricted. Some governments, such as Zimbabwe and Myanmar, have limited citizens’ access to their fiat by instituting daily or monthly withdrawal caps on bank accounts. Zimbabwe set a weekly withdrawal limit of 20 Zimbabwe Dollars (ZWD) as of 2019. In 2021, the Myanmar government imposed daily withdrawal limits of 500,000 kyat (roughly $350 USD).

Income Generation: DAI token holders can earn income through lockup and interest generation by utilizing the DAI Savings Rate (DSR) system. It does not have its own staking mechanism since DAI is built on the Ethereum blockchain and leverages the network’s own consensus mechanism. MakerDAO allows DAI token owners to earn returns by depositing their tokens into MakerDAO smart contracts. With this specialized smart contract system, the user’s investment is secured. There is no minimum investment amount and withdrawals can be made at any time.

Fast and Cheap: The fees for international wire transfers can be prohibitively high, and the time it takes to complete a transfer can be crippling. Transacting globally becomes easier and more transparent when DAI charges nominal transfer fees and processes transactions quickly.

Always On: Traditionally, financial institutions are only open during business hours. Therefore, transactions through such institutions can remain pending for days before finalizing once the banking institutions are open and funds are transferred have actually processed. Nonetheless, DAI and the Ethereum blockchain allow transactions to be completed anytime and anywhere within minutes.

Highly secure: MakerDAO conducts extensive audits and research in order to ensure the platform is safe. The developers formalize the verification of all smart contracts and underlying protocol mechanisms that make up the internal structure of the system through mathematical analysis.

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