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What is DAI?

The 2008 financial crisis was the first indication to many that centralized financial systems were seriously flawed. As has been seen of late, fiat currency has been printed at an alarming rate, in an effort to stimulate the economy and deal with the global pandemic. The result has been heavy inflation, and huge increases in the price of goods, services and other assets.

Naturally cryptocurrencies were created as a means to help combat the inflation and currency debasement (lowering of value) that is commonly paired with economic challenges. One of the major challenges however, is that crypto is a very volatile space - meaning Bitcoin, Ethereum, and other cryptocurrencies can fluctuate in price tremendously.

The Dai stablecoin system aims to solve this crypto volatility problem, providing users with a cryptocurrency with a stable 1-to-1 ratio of cryptocurrency to US dollar.

Who created DAI?

Rune Christensen, a Danish developer, launched the MakerDAO project in 2015. His vision was simple - build a decentralized financial system governed by its user community. By doing so, the makerdao community would theoretically have more control of their assets, as no centralized authority would be able to manipulate the price of the assets in uncertain economic times.

Maker Foundation (as it ultimately became) surrendered control of the Maker Protocol, making it open source to become a fully autonomous decentralized organization (DAO). The name shifted from Maker Protocol to MakerDAO. The MakerDAO protocol consists of smart contracts and a decentralized governance system built on the Ethereum blockchain.

The community drives the Maker Governance system. Any individual from anywhere in the world who holds MKR, MakerDAO's governance token, has the right to vote on network modifications, allowing them to democratically govern the network.

Recently Christensen dissolved the Maker Foundation, in an effort to make the decentralized stablecoin DAI, truly decentralized.

Collateralized Debt Position (CDP)

The Maker Protocol, also known as the Multi-Collateral Dai (MCD) system, enables users to create DAI by utilizing collateral assets validated by Maker Governance.

If you want to get your hands on some stablecoin, first, you need to open up a CDP with MakerDAO and deposit Ether (ETH), BAT tokens, wrapped BTC (WBTC), or USDC (Coinbase' US dollar stablecoin) as locked collateral. At this point, you can generate Dai tokens on a 2:1 basis. Meaning, if you deposit $200 of ETH, you will receive $100 worth of DAI. 

Hence, in the unlikely event that 25% of the value of your ETH token is wiped off, you will still have over $150 in collateral.

And what happens if Ethereum skyrockets and goes to the moon? It's a win-win. Simply return DAI tokens and get your ETH tokens back after you pay a small maintenance fee. 

Why the DAI stablecoin is important

Currently, there are over a thousand cryptocurrencies on the market. However, most cryptocurrencies lack stable value. As a result, potential investors stay away from these coins because they fear the volatility could ruin the value of their portfolio. For instance, if you want to buy Ethereum, it may cost you $300 when you buy it, but hours later the price may have dropped, and your ETH might only be worth 60% as much. 

The DAI stablecoin creates a stable asset in the crypto space for holding investment capital. Moreover, DAI allows users to buy and trade in crypto assets without having to worry transfer money to and from their bank account whenever they want stability.

In the cryptocurrency industry, where one development or announcement can send the market cap of a crypto soaring or plummeting in minutes, DAI offers stability. Unaffected by these price swings, DAI helps both sellers and buyers be sure they are trading in US dollar value . This makes DAI ideal for daily transactions, savings, and other decentralized application (dApp) initiatives that are currently being built.

What is DAI backed by?

Most stablecoins claim they are backed by equal amounts of US dollars, or their equivalent, in reserve. And although DAI is pegged to the dollar, it is not backed by it.

As strange as it sounds, DAI is backed by other cryptocurrencies through collateralized debt positions. Thus DAI is backed by the value of other cryptocurrencies much of which comes from the USD stable Coin (USDC), each of which is said to be backed by US dollars.

The remainder is backed by Ethereum, which means if the cryptocurrency market crumbles, and the price of Ethereum plummets, the value of DAI will likely take a hit.

What makes Dai different from Tether, another stablecoin in the crypto market, (that recently came under fire due to misleading investors into believing they were fully backed by stable fiat at all times) is that MakerDAO has a fully decentralized, smart contract based system which ensures there's no chance of issuing more tokens than what they have in reserve. 

The Future of DAI

With DAI at its center, the Maker ecosystem has already seen robust adoption in its few years of existence. Some popular decentralized finance (DeFi) projects and decentralized apps (dApps) built on the protocol include Curve Finance, DeFi Saver, and Uniswap. Even Unicef is accepting donations in DAI for blockchain-based social projects.

Though DeFi is the first application of a stablecoin one might think of, the Maker Foundation has not limited its sights to that sector. They are looking to expand into the digital art market by encouraging artists to trade in DAI. The foundation has also launched a gaming initiative to incentivize game developers to build on the Maker protocol. They are already linked to some gaming projects such as Blocklords and League of Kingdoms. 

With economies and governments printing trillions of dollars out of thin air, an economic slump (or even collapse) is imminent. As we have seen with recent economic turmoil, along with it comes panic and increased cryptocurrency adoption. Being a stable cryptocurrency gives DAI the best chance of being adopted by individuals, merchants, and banks alike because it can better maintain its value during economic downturns. 

This, along with its many use cases and desire to branch out into other blockchain sectors, makes the Maker ecosystem a contender for the future of stability in the crypto space.

DAI Reference Links:
If you’re interested in learning more about DAI, you can visit the links below:
DAI Website What is DAI?
DAI Whitepaper MakerDAO Protocol Whitepaper
MakerDAO Blog Benefits of DAI

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