What is DAI? Your ultimate guide
What is DAI? It's a so-called 'stablecoin' that is generating a lot of interest right now
You may have heard about the stablecoin known as DAI, but have you ever asked “what is it?”? If so, we will tell you all about it in this article.
The most important thing to note about the DAI coin is that it is what is known as a "stablecoin".
A stablecoin is a cryptocurrency where the price is designed to be pegged to a cryptocurrency, fiat money (a currency that is established as money by the government) or to an exchange-traded commodity such as gold or precious metals.
This means that DAI’s price is linked to a fiat currency, in this case, the US dollar. The idea is for the coin’s value to match up exactly to the dollar. If the price stays flat for a long time, that is a good thing.
DeFi and DAOs
Decentralised finance, or DeFi, is the idea that helped cryptocurrency blossom. The concept behind DeFi is that you can have financial transactions that bypass traditional banks. In fact, it was the Great Recession of 2007–2009, which was caused by the subprime mortgage crisis and resulted in increased distrust of banks and bankers, that ultimately spurred the creation of cryptocurrencies such as bitcoin.
However, even if there was not a distrust of big banks among certain parts of the population, there are many interesting ideas and advantages behind DeFi. For instance, according to data supplied by the World Bank, there are 1.7 billion people who do not have a bank account. Roughly 66% of them own a mobile phone, however. Advocates of DeFi are hoping to reach these people, which will, it is hoped, promote greater financial inclusion.
The tools to help achieve this are often available in the form of decentralised applications, or DApps for short. DApps run on a blockchain, and are outside the control of a single authority,
There are theoretical benefits for international financial transactions, too. One issue many people have when sending money around the world is the high commission fees and remittance services charges, while another is the cost of currency conversion. The idea is that with a cheaper alternative, remittance charges and commission fees will drop, and currency conversion will then become cheaper so as to remain competitive.
One element that DeFi uses to help achieve its goals are decentralised autonomous organisations – otherwise known as DAOs. A DAO is a programme that is usually based on the Ethereum blockchain, and has a built-in ability to help people manage their code.
The original DAO was effectively closed in 2016 after hackers managed to exploit security weaknesses. This, in turn, led to the Ethereum (London) Hard Fork that created the ethereum classic cryptocurrency. However, whatever its flaws, the principle behind the original DAO lives on and organisations such as MakerDAO, as well as the likes of Aragon, MolochDAO and MetaCartel, are helping to establish DAOs as a valid concept once again.
How stablecoins differ
Many DAOs have their own native crypto token, and MakerDAO is no exception – its native token is the DAI coin.
As we have already said, however, the difference between the DAI and other native tokens is that the DAI is a stablecoin. This means there is nowhere near as much volatility as you would find in a regular crypto token. In fact, we can see the difference here.
If we look at these charts, the difference becomes clear. While the ANT cryptocurrency is very volatile, with dizzying heights and terrifying lows, the DAI coin is far more comfortable, steady and stable. That is because fiat currencies are usually not as volatile as crypto: even if the US dollar did move significantly, the DAI cryptocurrency would move with it.
This is the basic premise of the DAI, as we have explained. But what was the reason for its creation?
MakerDAO and MKR
MakerDAO was founded in 2014 by the Danish entrepreneur Rune Christiansen. The idea behind its creation was that it was “dedicated to bringing stability to the cryptocurrency economy”. This is an important concept because, as anyone who has been following the world of crypto will tell you, cryptocurrencies can be incredibly volatile.
The way MakerDAO tries to do that is by having two native tokens. One, called MKR, is used as a governance token.
Maker (MKR) is a cryptocurrency on the Ethereum blockchain that is designed to minimise the price volatility of its own US$-pegged cryptocurrency, DAI. MKR holders can vote on proposals about changes to the network. The more MKR you hold, the more voting power you have.
MKR also works as an investment in MakerDAO itself. If you hold MKR, you can, in effect, loan it out. The interest people generate from loans of MKR is used to buy MKR tokens and then burn these. (To “burn” a cryptocurrency coin means to send a usable token, or a fraction of a token, to an unusable account.)
Burning effectively removes tokens from the available supply, thus increasing their relative scarcity. This scarcity should, at least in theory, keep the price of MKR sustainable.
The purpose of DAI
What of DAI itself? What is its purpose?
DAI uses the Ethereum blockchain. Its purpose is that it links in with what MakerDAO wants to do, which is to allow people to take out loans backed by crypto. MakerDAO’s loans use smart contracts, computer programs with an agreement that is automatically executed once the terms are met.
People can put up cryptocurrencies and, in turn, take out a loan in DAI. What is interesting about DAI in relation to some other stable coins is that it is not backed by a private company: it is backed by the MakerDAO itself.
But how does DAI maintain its value level to, or at least close to, the value of the US dollar?
Again, this is done through smart contracts. The contracts execute to make sure the value of DAI is as close to the dollar as possible.
DAI and safety
One concern potential holders will have is whether the DAI cryptocurrency is safe.
There was some concern back in March 2020 when the price of ether crashed from $191 to $88 as markets panicked in the aftermath of the COVID-19 pandemic. This meant the price of DAI itself wobbled, and it was trading at around $0.97. While that is close to $1, it is not optimal. This meant that MakerDAO had to make some changes to how the protocols worked. The price was ultimately able to stabilise at or very close to the $1 mark.
Another safety aspect is that DAI has an integrated wallet, an integrated proximity wallet contains standardised processes, such as for payments (for example, payment processing, authentication and transaction history). Service providers, such as card-issuing banks, do not require their own app, but instead use the integrated processes for payment processing. This means DAI has security features. MakerDAO also carries out secure audits which should help protect investments.
Finally, if you want to know where the name DAI comes from, it is the name of a Chinese character that translates as “to lend” or “to provide collateral for a loan”.
As far as the value of the DAI goes, since it is a stable coin, it is relatively safer than other cryptos. Nevertheless, things can happen to cryptocurrencies that have an impact on the value of a stable coin.
You need to do your own research, and remember that prices can go down as well as up or stay stable. You should never invest more than you can afford. Also remember that hacks can happen, so you could lose your investment that way.
The DAI coin is used to take out loans against collateral through the MakerDAO. It can also be used as an investment, or for trading with other cryptocurrencies. Since it is pegged to the US dollar, some people might use it as a store of value.
If you want to buy DAI, you can do it at a range of exchanges, including currency.com.
Just remember to do your research and never invest more money than you can afford to lose.