- Dai is a fully decentralized stablecoin
- Any Crypto user can take a loan in Dai by collateralizing their crypto
What is the DAI stablecoin?
Dai is a stablecoin, and stablecoins are digital assets whose value is always expected to remain constant. Hence, the value of dai also remains constant. The majority of stablecoins are backed by the US dollar, while Dai is a soft-pegged stablecoin. This is because it maintains a price equal to the US dollar. But since the US Dollar does not back it, it is backed by other cryptocurrencies such as Bitcoin and Ethereum.
Dai stablecoin tries to deal with a major roadblock in the world of cryptocurrencies: high volatility. All the major cryptocurrencies like Bitcoin and Ethereum are tradeable; hence, due to trading, they experience high price volatility. A 20–30% change in price is common for these cryptocurrencies. Due to this, their mainstream adoption is hard; hence, stablecoins were launched. They provide all the benefits of cryptocurrencies with the stability of fiat currency.
How does the DAI stablecoin work?
The Dai stablecoin differs from peer stablecoins like USD Coin and Tether in that they are not totally decentralized; instead, they are governed and maintained by a centralized authority. DAI, on the other hand, is run and governed by Maker DAO, a decentralized organization. Maker DAO is a project built on the Ethereum blockchain in 2014.
Maker is managed by the people directly because it gives the maker’s governance token holders the ability to buy and participate in the decision-making process. Users can vote on major decisions in the organization. Dai cryptocurrency is based on the Ethereum token, which means it has all the advantages that Ethereum provides through its ERC token standard.
DAI is used to lend cryptocurrency. Users can deposit any cryptocurrency to issue a Dai token. But dai is not issued exactly equal to the deposited cryptocurrency.
Dai is used to take loans in cryptocurrency. Dai works like a decentralized bank for cryptocurrencies. For example, suppose a crypto user wants a loan. In that case, they can deposit the crypto assets as collateral, and Dai will be issued depending on the amount of the asset deposited as collateral. Currency Dai keeps 150% of assets as collateral.
For example, if Dai equivalent to $100 is issued, then Ethereum worth $150 should be deposited. This is done to maintain the price volatility of cryptocurrencies. Every time crypto currencies are kept as collateral, new Dai tokens are minted, and if a user takes back the token to provide a Dai equivalent to its value, then the Dai token is burned to maintain the supply of the token.
Advantages of Dai Stablecoin
Some of the most popular advantages of DAI stablecoin are:
- Stable Value: Dai is a very stable cryptocurrency. It provides users a way to escape the crypto market’s volatility while investing in cryptocurrency.
- Decentralized Finance: While there are several stablecoins on the market, only a few are decentralized. Because the majority of them are handled by centralized organizations, they are always subject to control by a few people who own these centralized institutions. But Dai is different. It is managed by the Maker Dao, which is a decentralized entity, and the community takes all the decisions with its governance token.
- Always On: This is an always-available service for users. It is always available to users. Centralized services, such as banks and other financial institutions, are frequently closed on Saturdays and Sundays.
