Dai (DAI) is a decentralised, collateral-backed cryptocurrency which has a target price of 1 US dollar operating on the Ethereum network.
Unlike its centralised cousins (i.e. USDT, USDC and USDP), DAI doesn’t promise that its tokens are backed 1:1 with US dollars. Instead, it holds a diverse basket of ERC-20 tokens deposited by users as collateral, who are compensated with an equivalent amount of DAI. When the value of the tokens goes up, more DAI is introduced into the system but people can still buy back their collateral at the original price. When the value of the tokens goes down, parts of the asset basket are liquidated to maintain the peg, meaning depositors’ collateralized positions will also be reduced and they receive back less than you put in.
DAI has been developing its Collateralized Debt Position (CDP) system since 2014 and it remains the biggest player in the decentralised algorithmic token space. DAI’s governance token – allowing holders to vote on changes to the DAI protocol – is known as the MKR Token and is also available on CoinJar.
Users generate DAI by depositing collateral assets into Maker Vaults within the Maker Protocol. This is how DAI is entered into circulation and how users gain access to liquidity. DAI claims that every DAI in circulation is directly backed by excess collateral, meaning that the value of the collateral is higher than the value of the DAI debt. All DAI transactions are publicly viewable on the Ethereum blockchain.
As a decentralised cryptocurrency, holders of MKR Tokens (the governance token of the Maker Protocol) can vote on changes to the Maker Protocol. Smart contracts manage each type of vote which applies any successful proposals immediately to the internal governance variables of Maker Protocol. These include adding new collateral types, changing risk parameters or triggering an emergency shutdown.
DAI is backed by collateral who can themselves be volatile, such as Ethereum (ETH). If the value of the collateral drops significantly, it could trigger automatic liquidation of the collateral and cause the value of DAI to fluctuate.
DAI uses algorithmic smart contracts to maintain price stability and to ensure that DAI tokens are always kept fully collateralized. Errors or bugs in the smart contract may cause the value of DAI and any collateral held to drop significantly in value and lead to total loss. Users should be aware that other tokens which have used algorithmic smart contracts to maintain their value, such as Terra (LUNA) have failed, leading to total loss of value.
There is also regulatory uncertainty about future treatment of decentralised coins. Users should consider that there is a very high risk involved in using algorithmic tokens and should never treat these tokens as a store of value.
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