Dai is one of several stablecoin endeavors softly pegged to the U.S. dollar, hoping to make a cryptocurrency nonvolatile enough for everyday commerce. The Ethereum-based project strives to leverage the benefits of blockchain technology but avoid the dramatically volatile prices of the wider cryptocurrency market.
While there are a handful of stablecoins jostling for traction, its proponents see Dai as the best poised to deliver a decentralized version capable of actually fulfilling Bitcoin founder Satoshi Nakamoto’s original aspiration for blockchain technology. Learn more about how Dai works and whether it’s worth your while to invest in it.
What Is Dai?
Dai is a cryptocurrency based on the Ethereum network. It is a stablecoin, which means that Dai is pegged to the U.S. dollar, resulting in lower price volatility compared to other blockchain-based currencies. Low volatility also makes it resistant to hyperinflation like that seen in Venezuela in recent years.
The Dai stablecoin system was the brainchild of Danish entrepreneur Rune Christensen, who first introduced it as eDollar in a reddit post in 2015. The whitepaper introducing the world to “Single-Collateral Dai'' was not published until December 2017.
Maker Foundation was the name of a team of open-source engineers and staff who initiated building and growing the Dai currency and ecosystem. One of the Foundation’s objectives was to make the governance of Dai itself decentralized, by bootstrapping the growth of the MakerDAO (the DAO in MakerDAO stands for “Distributed Autonomous Organization”). The MakerDAO is a collective of engineers and members incentivized to govern and oversee the stability of Dai across time.
In July 2021, CEO Christensen announced complete decentralization of MakerDAO and the dissolution of the Maker Foundation.
Special Features of Dai
Dai is by no means the first or biggest of stablecoins. Launched in 2014, Tether, another stablecoin pegged to the U.S. dollar, had a market cap of nearly 11 times that of Dai, as of July 2021.
While it may not be the largest stablecoin, because of the MakerDAO—the autonomous body governing it—Dai claims to to be a truly decentralized stablecoin.
Members of the MakerDAO make determinations about the currency, including the variable Dai Savings Rate (DSR). Dai holders can earn an accrual or savings if they lock their tokens in the DSR smart contract.
In a manner similar to the U.S. Federal Reserve’s monetary policy for the U.S. dollar, the MakerDAO also alters the savings rate to dampen or heighten demand to keep the value of the currency stable. Other parameters of the ecosystem can be changed to meet community needs through the governance process, too.
Maintainers of the ecosystem each hold some of the ecosystem’s separate governance token called MKR. This governance token is used to vote on the parameters of the ecosystem, and is completely independent from Dai itself, so as to not skew the MakerDAO’s incentives. Anyone can propose a change to the ecosystem, but only MKR holders are eligible to vote. The weight of any vote on a systemwide decision is directly proportional to the amount of MKR a maintainer stakes in their vote. So the more money a MakerDAO member uses to cast a vote, the better chance they have of tipping the outcome in their favor. MKR holders might put a proposal up to a wider community poll to find consensus before voting.
|Already Mined/Total Supply (as of July 21, 2021)||$5.48 Billion/UNKNOWN|
|Special Feature||Decentralized stablecoin, Dai Savings Rate accrual|
How To Mine Dai
Dai is not mined like most cryptocurrencies.
Unlike Bitcoin—where, once all 21 million bitcoins have been mined and are in circulation, all the bitcoins there ever will be in the universe, will be—the supply of Dai is not predetermined or strictly limited, which is part of how the coin is able to remain stable.
To increase supply, rather than minting new blocks, Dai is created when someone uses collateral to take out a loan from the community, or MakerDAO. Conversely, Dai is destroyed as these loans are repaid.
This constant churn, always in step with demand, ensures there is never more in the ecosystem than needed, so the currency can hold its value.
Originally, loans could only be made via ETH, Ethereum’s digital token. Hence the title “Single-Collateral Dai.” Users retain their original ETH when they join the Dai ecosystem; it is just locked up using smart contracts, and the value of the ETH generates a loan of equal value in Dai. The initial ETH remains locked up until the time the user pays back the full amount of Dai lent, plus interest. Once the loan has been paid back in full, the user can cash out on their ETH investment or make other transactions in the Ethereum ecosystem.
In 2019, a second cryptocurrency approved for collateral, called BAT, was added, transforming the currency into “Multiple-Collateral Dai.”
In March 2020 , the crypto markets suffered extreme volatility—and Dai was no different. Many accounts became undercollateralized, and the system was recapitalized through debt auctions, where the MKR token was auctioned for Dai. To bolster liquidity in the system, MKR holders voted to designate a handful more crypto assets as acceptable collateral, meaning they would share status with ETH in their capacity to generate loans and create more Dai.
As of May 2020, four cryptocurrencies – ETH, BAT, USDC, and WBTC – can be used as collateral for loans in order to generate Dai.
Total Supply of Dai
As of July 21, 2021, there is approximately $5.48 billion Dai in circulation. This number fluctuates depending on the outstanding loans made using Ethereum and other approved digital currency assets to fund the ecosystem.
How To Buy Dai
Dai can be traded on cryptocurrency exchanges such as Coinbase and Kraken. The Maker Ecosystem is supported by numerous apps and services, all listed on the currency’s website.
Dai is also supported by a wide variety of wallets.
|Wallet Type||Wallet Name|
|Hardware Wallet||Trezor, Ledger, KeepKey|
|Web/Paper Wallets||MyCrypto, MyEtherWallet|
|Mobile Wallets||Coinbase Wallet, Guarda Wallet, Celcius
Fees and Expenses
Each collateral type has its own stability fee determined by the MakerDAO. This means that as long as someone has a collateral put up in order to take out Dai, a small amount of interest accumulates annually in Dai on the amount of collateral.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
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MakerDAO. "WBTC Approved as Collateral by Maker Governance; Generate Dai Now With Bitcoin." Accessed July 23, 2021.
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