DAI is a decentralized stablecoin cryptocurrency that maintains a soft peg to the US Dollar, aiming to keep its value as close to $1 USD as possible. Unlike centralized stablecoins such as USDC or USDT, DAI isn't backed by traditional currency held in bank accounts. Instead, it uses a complex system of smart contracts and overcollateralized cryptocurrency deposits to maintain its stability.
DAI is created through Maker Protocol, a system of smart contracts running on the Ethereum blockchain. Users can generate DAI by depositing supported cryptocurrencies as collateral into Maker Vaults. These deposits must be overcollateralized, meaning users need to deposit more value than the DAI they wish to generate. For example, if you want to generate 100 DAI, you might need to deposit $150 worth of ETH as collateral.
DAI maintains its price stability through several mechanisms. The primary method is the Maker Protocol's automatic liquidation system. If the value of collateral backing DAI falls too low, the system automatically liquidates positions to ensure DAI remains properly collateralized. Additionally, the protocol uses a Target Rate Feedback Mechanism (TRFM) and adjustable stability fees to influence supply and demand.
DAI serves multiple purposes in the cryptocurrency ecosystem:
The main advantage of DAI is its decentralized nature - no single entity controls the system, making it resistant to censorship and manipulation. Users don't need to trust a centralized company to maintain proper reserves. However, DAI does face risks, including potential smart contract vulnerabilities, extreme market volatility affecting collateral values, and systemic risks in the broader DeFi ecosystem.
As one of the first decentralized stablecoins, DAI played a crucial role in the growth of decentralized finance (DeFi). It enables users to engage in lending, borrowing, and trading without relying on traditional financial institutions. The stability and decentralized nature of DAI make it a foundational building block for many DeFi applications and protocols.
MakerDAO continuously evolves the DAI system to improve stability and usability. Recent developments include multi-collateral DAI, which allows various cryptocurrencies to be used as collateral, and real-world asset integration, which explores using traditional assets like real estate and invoices as collateral for DAI generation. These innovations aim to make DAI more robust and accessible while maintaining its decentralized nature.