What is Dai? (DAI)
The Beginner’s Guide
The first decentralized, collateral-backed cryptocurrency, DAI is a crypto asset that attempts to maintain a stable 1:1 value with the U.S. dollar by locking other crypto assets in contracts.
This means that unlike other asset-backed cryptocurrencies, which may be issued by for-profit companies, DAI is the product of an open-source software called the Maker Protocol, a decentralized application running on top of the Ethereum blockchain.
As such, DAI maintains its value not by being backed by U.S. dollars custodied by a company, but by using collateralized debt denominated in ether (ETH), Ethereum’s cryptocurrency.
If you’re unfamiliar, collateralized loans provide a way for a lender to secure a loan using assets they own. Historically, these loans have a lower interest rate than unsecured loans, as they allow lenders to seize the asset and sell it in the event borrowers are unable to pay the loans.
The Maker Protocol, through smart contracts running on Ethereum, enables borrowers to lock ETH and other crypto assets, thus collateralizing it, in order to generate new DAI tokens in the form of loans.
If borrowers wish to recover the locked ETH, they will have to return the DAI to the protocol and pay a fee. In the event of liquidation, the Maker Protocol will take the collateral and sell it using an internal market-based auction mechanism.
Due to its design, the supply of DAI cannot be altered by any party in the network. Rather, it is maintained through a system of smart contracts designed to dynamically respond to changes in the market price of the assets in its contracts.
For more regular updates from on the project, you can bookmark its official Medium blog, which includes tips and tutorials on the network and its evolving technology.
Who created Dai?
Founded in 2014 by Rune Christensen, the Maker Foundation created the Maker Protocol, an open-source project whose goal was to operate a credit system that would allow users to take out loans collateralized by cryptocurrencies.
DAI officially launched on the Maker Protocol in 2017 as a means to provide a non-volatile lending asset for businesses and individuals.
The Maker Foundation eventually gave up control of the software to MakerDAO, a decentralized autonomous organization that now governs the Protocol.
How does Dai work?
DAI is a crypto asset that is collateralized by other cryptocurrencies.
If users want to acquire DAI, they can spend ETH to purchase the dollar equivalent amount in DAI on an exchange or they can collateralize ETH and other assets using the Maker Protocol.
The latter method allows users who do not want to sell their ETH to still acquire DAI.
Collateralized Debt positions
Collateralized Debt Positions (CDPs) are the smart contracts on the Maker Protocol that users can leverage to lock their collateral assets (i.e., ETH or BAT) and generate DAI.
CDPs can be thought of as secure vaults for storing the aforementioned collateral. To account for the volatility in the crypto collateral, DAI is often over-collateralized, meaning that the deposit amount required is typically higher than the value of DAI.
For example, users must spend $200 in ETH in order to receive $100 DAI, which is meant to account for the potential decrease in the value ETH. As a result, if ETH depreciates by 25%, the $100 in DAI would still be safely collateralized by $150 in ETH.
In order to recover the stored ETH, the user has to return the DAI and pay a stability fee.
Why does DAI have value?
Stablecoins like DAI can offer traders a powerful tool for avoiding the sometimes extreme volatility of the many cryptocurrencies whose prices are determined by the open market.
For example, by moving value to DAI, a trader might reduce their risk of exposure to a sudden drop in the price of Bitcoin or Litecoin. However, this could come at the cost of losing exposure to a sudden increase in value as well.
Another advantage to DAI is that it may remove transaction costs and delays that impair trade execution within the crypto market when using traditional government currencies, which may need to move between banks, delaying optimum execution.
DAI also offers users the ability to access loans in a way that may offer advantages over existing options. As opposed to a process in which their credit is evaluated by a bank or financial institution, DAI users can simply put up ether and receive DAI.
When they decide to pay the loans back, they only pay a small, additional fee.
Kraken's Crypto Guides
- What is Bitcoin? (BTC)
- What is Ethereum? (ETH)
- What is XRP? (Ripple)
- What is Bitcoin Cash? (BCH)
- What is Litecoin? (LTC)
- What is EOSIO? (EOS)
- What is Stellar? (XLM)
- What is Cardano? (ADA)
- What is Monero? (XMR)
- What is Tron? (TRX)
- What is Dash? (DASH)
- What is Ethereum Classic? (ETC)
- What is Zcash? (ZEC)
- What is Basic Attention Token? (BAT)
- What is Algorand? (ALGO)
- What is Icon? (ICX)
- What is Waves? (WAVES)
- What is OmiseGo? (OMG)
- What is Gnosis? (GNO)
- What is Melon? (MLN)
Why use DAI?
Users may be interested in buying DAI because it offers the efficiency and transparency benefits of cryptocurrency while offering protection from price volatility.
DAI, like many other cryptocurrencies is borderless, programmable and easy to transfer, and it has the added bonus of offering a stable price.
Kraken users can quickly transfer DAI to their accounts and exchange DAI for other cryptocurrencies.
Start buying DAI
Now you're ready to take the next step and buy some DAI!