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Buy Maker Dai (DAI) in UK With GBP | CoinJar
Maker Dai
DAI
Overview
What is Maker Dai?
Why investors buy DAI: What is Maker DAI? Want to buy DAI on CoinJar? Here’s what you need to know.
Understanding MakerDAO and the DAI Stablecoin
MakerDAO is a decentralised autonomous organisation (DAO) built on the Ethereum blockchain. Its mission is to create a stable and decentralised digital currency. Let’s dive into the details of what Maker DAI is and how you can acquire it.
What is DAI: The user-friendly explanation
Here’s a user-friendly way to describe how it works. Imagine you have a virtual coin called “DAI.” It’s similar to a regular coin, but it always tries to stay worth the same as one U.S. dollar.
So how does it stay stable? It is created using something called a “smart contract” on the Ethereum blockchain. Think of this smart contract as a set of rules that govern how the crypto works.
Say you have some Ethereum (ETH). You can use it as a kind of security deposit to create Dai. This is done through a platform called the Maker Protocol.
Think of it like this: You put your ETH in a digital vault called a “Collateralised Debt Position (CDP)”. It's like putting your ETH in a safety deposit box. Then, the Maker Protocol gives you Dai in return, based on how much ETH you put in.
Now, here's the catch: Because the value of cryptocurrencies can change a lot, you have to put in more ETH than the value of the Dai you want to get. This is called over-collateralisation.
For example, if you want £100 worth of Dai, you might need to put in £200 worth of ETH. This is to make sure that even if the value of ETH goes down, there's still enough value to cover the Dai.
When you want to get your ETH back, you have to return the Dai you borrowed, plus a small fee for using the Maker Protocol. It's like paying rent for using the vault.
So, in user friendly terms, Dai is digital money you can get by trading it for Ethereum, or by using Ethereum as a deposit in a special digital vault called a CDP.
What stability means for users
DAI ideally offers stability (but nothing is guaranteed in stablecoin world!). This is good for things like online shopping (mostly with merchants accepting funds via payment companies that enable crypto payments).
You can theoretically use it to buy things online, just like using Sterling.
Regular cryptocurrencies (like Bitcoin) can swing up and down a lot in price. DAI aims to stay steady in price (“soft pegged” to the US dollar).
When you send DAI to someone in another country, they should get the same value without worrying about exchange rates.
Say your cousin in America needs some cash. Instead of dealing with exchange rates and bank fees, you send them DAI instead. This is without all the bank fees and then the banks converting currency in their favour.
Because the price theoretically stays stable (“soft pegged” to the US dollar), people use it in decentralised finance (DeFi) apps. These apps let you lend, borrow, and earn interest.
Other uses
It has other uses. Imagine you’re a crypto trader. When other coins swing wildly, you can switch your existing crypto into DAI to keep stability.
You can lend your DAI on platforms like Compound or Aave. Your DAI earns interest, and you don’t lose sleep over price fluctuations as it is “soft pegged” to the US dollar.
What is DAI? A more technical explanation
It is a stablecoin pegged to the US dollar. Unlike other cryptocurrencies, its value remains relatively stable, making it suitable for everyday transactions.
It is created through a system of collateralised debt positions (CDPs). Users lock up crypto assets (such as Ethereum) as collateral to generate DAI.
The collateralisation ratio determines how much of it can be minted against the locked assets.
If the value of the collateral drops, users may need to add more assets or repay part of their debt.
Outstanding debt refers to the total amount of DAI in circulation.
MakerDAO components
Smart contracts
MakerDAO relies on smart contracts to manage the creation and redemption of DAI. These contracts aim to ensure transparency and protection.
MKR tokens
MKR is the governance token of MakerDAO. MKR holders participate in decision-making processes, including voting on stability fees and other protocol changes.
Stability fee
When users create DAI, they pay a stability fee. This fee compensates MKR holders and helps maintain the stability of the system.
DAI Savings Rate (DSR)
The DSR allows users to earn interest by holding the crypto in a savings account within the MakerDAO ecosystem.
What risks should I be aware of?
DAI is backed by collateral which can itself 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.
It uses algorithmic smart contracts to maintain price stability (“soft pegged” to the US dollar) and to ensure that the tokens are always kept fully collateralised.
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.
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Frequently asked questions
Is buying cryptocurrency safe and legal?
While crypto investments carry risks, CoinJar prioritises security with offline storage and robust protocols. Cryptocurrency regulations vary by country. In the UK, it’s legal to buy, hold, and trade crypto, however cryptocurrency is not regulated in the UK.
In the UK, it’s legal to buy, hold, and trade crypto, however cryptocurrency is not regulated in the UK. It's vital to understand that once your money is in the crypto ecosystem, there are no rules to protect it, unlike with regular investments. You should not expect to be protected if something goes wrong.
So, if you make any crypto-related investments, you’re unlikely to have recourse to the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS) if something goes wrong.
What is Maker DAI?
It is a decentralised, collateral-backed cryptocurrency operating on the Ethereum network. Unlike centralised stablecoins (such as USDT or USDC), it is said to be “soft pegged” to the US dollar.
It maintains its value through a diverse basket of ERC-20 tokens deposited by users as collateral.
When the value of these tokens fluctuates, more DAI is introduced or liquidated to maintain the peg to $1 USD. It has been a major player in the decentralised algorithmic token space since 2014.
How does DAI maintain its value?
Users generate it by depositing collateral assets into Maker Vaults within the Maker Protocol.
Each DAI in circulation is directly backed by excess collateral, ensuring that the value of the collateral exceeds the DAI debt.
All transactions are publicly viewable on the Ethereum blockchain.The performance of most cryptocurrency can be highly volatile, with their value dropping as quickly as it can rise.
What is the MKR Token?
The MKR Token is the governance token. MKR holders can vote on changes to the Maker Protocol, such as adding new collateral types, adjusting risk parameters, or triggering emergency shutdowns.
How can I borrow DAI?
Users can participate in the MakerDAO system. By depositing collateral, they can mint DAI through smart contracts. It serves as a stablecoin soft-pegged to the US dollar, making it a useful choice for borrowing and lending within the crypto ecosystem.
Who is Rune Christensen?
Rune Christensen is the founder of MakerDAO and a key figure in the development of the Maker Protocol. His vision has driven the creation of DAI and the decentralised credit system it represents.
Who are MKR token holders?
MKR token holders play a crucial role in governing the Maker Protocol. They vote on proposals, risk parameters, and system upgrades. Additionally, MKR tokens serve as an investment in the MakerDAO system.
Interest paid by borrowers is used to buy and burn MKR tokens, reducing their supply and making them deflationary.
What are DAI tokens?
They are the native stablecoin of the MakerDAO ecosystem. They are soft-pegged to the US dollar (1:1 basis) and backed by collateral locked in Maker Vaults.
It provides stability and liquidity within the decentralised finance (DeFi) space. Users can borrow DAI against their collateral and use it for various purposes.
How can I take out a loan in DAI?
To do this, follow these steps.
Collateralise: Lock up an approved cryptocurrency (such as ETH) in a Maker Vault. Generate DAI: Once your collateral is held, mint DAI tokens through a Collateralised Debt Position (CDP). These tokens represent your loan amount.
Repay: As you use the borrowed DAI, remember that it needs to be repaid eventually. You can use it for trading, hedging, or other DeFi activities.
Liquidation Risk: Be cautious! If the value of your collateral drops significantly, your CDP may face liquidation, leading to the sale of your collateral to cover the outstanding debt.
What are MakerDAO smart contracts?
MakerDAO leverages Ethereum smart contracts to create a decentralised financial system. These smart contracts automate various functions within the Maker Protocol, including:
Collateralisation: Users lock up approved cryptocurrencies (such as ETH) in Maker Vaults to generate DAI tokens.
DAI Creation: Tokens are minted through smart contracts, maintaining a soft peg to the US dollar.
Governance: MKR token holders vote on proposals and risk parameters, shaping the protocol’s evolution.
Stability: The system dynamically adjusts supply based on collateral value, ensuring stability.
Liquidation: If collateral value drops significantly, smart contracts liquidate positions to cover debt.
These Ethereum smart contracts power the Maker Protocol, providing a robust set of financial tools that fuel the decentralised finance (DeFi) ecosystem.
What is a Collateralized Debt Position (CDP)?
A Collateralized Debt Position (CDP) is a smart contract-based system created by MakerDAO on the Ethereum blockchain.
What is the Collateralization Ratio?
The Collateralization Ratio measures the percentage of a borrower’s total collateral value relative to the amount they wish to borrow.
Standard Risk Warning: The above article is not to be read as investment, legal or tax advice and it takes no account of particular personal or market circumstances; all readers should seek independent investment advice before investing in cryptocurrencies.
The article is provided for general information and educational purposes only, no responsibility or liability is accepted for any errors of fact or omission expressed therein. Past performance is not a reliable indicator of future results.
We use third party banking, safekeeping and payment providers, and the failure of any of these providers could also lead to a loss of your assets. We recommend you obtain financial advice before making a decision to use your credit card to purchase cryptoassets or to invest in cryptoassets. Capital Gains Tax may be payable on profits.
CoinJar's digital currency exchange services are operated in the UK by CoinJar UK Limited (company number 8905988), registered by the Financial Conduct Authority as a Cryptoasset Exchange Provider and Custodian Wallet Provider in the United Kingdom under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (Firm Reference No. 928767). In the UK, it's legal to buy, hold, and trade crypto, however cryptocurrency is not regulated in the UK.
It's vital to understand that once your money is in the crypto ecosystem, there are no rules to protect it, unlike with regular investments. You should not expect to be protected if something goes wrong. So, if you make any crypto-related investments, you're unlikely to have recourse to the Financial Services Compensation Scheme (FSCS) or the Financial Ombudsman Service (FOS) if something goes wrong.
The performance of most cryptocurrency can be highly volatile, with their value dropping as quickly as it can rise. Past performance is not an indication of future results. Remember: Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more at: https://www.coinjar.com/uk/risk-summary.
UK residents are required to complete an assessment to show they understand the risks associated with what crypto/investment they are about to buy, in accordance with local legislation. Additionally, they must wait for a 24-hour "cooling off" period, before their account is active, due to local regulations. If you use a credit card to buy cryptocurrency, you would be putting borrowed money at a risk of loss.
We recommend you obtain financial advice before making a decision to use your credit card to purchase cryptoassets or to invest in cryptoassets.
Specific risks associated with DeFi tokens Decentralised Finance (or 'DeFi') tokens (e.g. UNI, AAVE) are crypto-assets linked to financial applications and protocols built on decentralised blockchain technology. DeFi tokens carry the following risks:
Smart contract risk: DeFi relies heavily on smart contracts. Even a minor coding error or oversight can lead to a contract being exploited, potentially resulting in significant losses for DeFi tokens.
Regulatory risk: DeFi operates in a decentralised manner, often without intermediaries or financial crime controls. Regulatory bodies across jurisdictions might introduce new regulations impacting the use, value, or legality of certain DeFi protocols or assets.
Rug-pulls / Exit scams: Some DeFi projects might be launched by anonymous or pseudonymous teams, increasing the risk of "rug pulls" where developers abandon the project and withdraw funds, leaving investors with worthless tokens.
Data/oracle risk: DeFi protocols often rely on external data sources or 'oracles. Manipulation or inaccuracies in these data sources can lead to unintended financial outcomes within the protocols. Protocol complexity: The complexity of some DeFi protocols can make it difficult for average users to fully understand the mechanisms and associated risks.
Specific risks associated with meme coins:
'Meme coins' (e.g. DOGE, SHIB, PEPE) are crypto-assets whose value is driven primarily by community interest and online trends.
Meme coins carry the following risks:
Volatility risk: Meme coins can have extreme price volatility, often experiencing rapid and unpredictable price fluctuations within short periods. The value of meme coins can be influenced by social media trends, celebrity endorsements, and other factors unrelated to traditional investment fundamentals. Lack of utility: Meme coins often lack intrinsic value or utility, being primarily driven by community interest, online trends, and speculative trading.
Market manipulation: Meme coins may be susceptible to increased risk of market manipulation including 'pump-and-dump' schemes, where the price is artificially inflated followed by a sudden crash.
Lack of transparency: Meme coins may have limited available information about their development teams, goals, and financials. This lack of transparency can make it challenging to assess the credibility and potential of a meme coin accurately.
Emotional investing: Meme coins often garner strong emotional reactions from investors, leading to impulsive decisions. Emotional trading activity can amplify losses.
Specific risks associated with stablecoins:
There is a risk that any particular stablecoin may not hold their value as against any fiat currency; or may not hold their value as against any other asset. Stablecoins carry the following risks:
Depegging events: Depegging events may occur with stablecoins that fail to maintain adequate controls and risk mitigants. A depegging event is when the value of the stablecoin no longer matches the value of the underlying asset. This could result in a loss of some or all of your investment.
Counterparty risk: Counterparty risk arises when an asset is backed by collateral, involving a third party maintaining the collateral, which introduces risk if the party becomes insolvent or fails to maintain it.
Redemption risk: Redemption risk refers to the possibility that an asset's ability to be redeemed for underlying collateral may not be as anticipated during market fluctuations or operational issues.
Collateral risk: Collateral risk refers to the possibility of the collateral's value declining or becoming volatile, potentially impacting the asset's stability, particularly when it is another crypto-asset.
Exchange rate fluctuations: Stablecoins, often denominated in US Dollars, expose investors to fluctuations in the USD:GBP exchange rate. Algorithmic risk: Algorithm risk refers to the possibility of an asset's stability being compromised due to unexpected failure or behaviour of the underlying algorithm, potentially leading to loss of value.
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Cryptoassets traded on CoinJar UK Limited are largely unregulated in the UK, and you are unable to access the Financial Service Compensation Scheme or the Financial Ombudsman Service.
We use third party banking, safekeeping and payment providers, and the failure of any of these providers could also lead to a loss of your assets.
We recommend you obtain financial advice before making a decision to use your credit card to purchase cryptoassets or to invest in cryptoassets. Capital Gains Tax may be payable on profits.
CoinJar’s digital currency exchange services are operated in the UK by CoinJar UK Limited (company number 8905988), registered by the Financial Conduct Authority as a Cryptoasset Exchange Provider and Custodian Wallet Provider in the United Kingdom under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (Firm Reference No. 928767).
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