DAI Crypto is a decentralized coin of the DAI network. It is a part of the Ethereum blockchain network since 2017. Basically, it is a stablecoin (stable-price cryptocurrency) that tries to maintain a value of US $1 per 1 DAI. Here, it does so by locking other crypto assets in contracts. Organizations like the Maker Protocol and MakerDAO manage the development of this cryptocurrency.
In this article, you will learn about the DAI network and the DAI coin, which is the native cryptocurrency of the former. Furthermore, you will also get an idea of the history of DAI crypto and its uniqueness. Apart from that, the article also gives a description of the working of DAI, as well as its utility. Finally, you will also learn whether DAI is a good investment for you or not. Hence, to learn more, read on to the end of the article.
DAI Crypto: A General Overview of the Cryptocurrency
According to Coinbase, “Dai (DAI) is a decentralized stablecoin running on Ethereum (ETH) that attempts to maintain a value of $1.00 USD. Unlike centralized stablecoins, Dai isn’t backed by US dollars in a bank account. Instead, it’s backed by collateral on the Maker platform. Note: if the Dai credit system is upgraded or shutdown, Dai holders may need to convert their Dai to Ethereum through the Maker platform.”
DAI is a collateral-backed cryptocurrency that tries to maintain a price of US $1 per 1 DAI. It does so with the help of crypto assets by locking them in contracts. Here, DAI is not an asset-backed crypto, as no for-profit companies issue it. Basically, Maker Protocol, an open-source software, produces the DAI coin. This software is a decentralized application that runs on the Ethereum blockchain.
Generally, like other cryptocurrencies on a blockchain, DAI tries to maintain its value without any centralization. This is because, it does not have the backing of US dollars or any custody of a company. To maintain its value, DAI makes use of collateralized debt denominated in ether (ETH), which is Ethereum’s cryptocurrency.
In general, loans with collateral enable the lender to secure their loan using their own assets. Furthermore, these loans also have a lower rate of interest than unsecured loans. This is because, these loans allow lenders to seize the asset of the loan. Also, they can sell the asset when the borrower of the loan is unable to repay it back.
What Makes DAI Crypto Unique?
The most unique aspect of the DAI coin is its backing of collateral. The Maker Protocol software enables its borrowers to lock the ETH coin and other crypto assets. It does so by running smart contracts on the Ethereum platform. This helps in collateralizing the asset and generating new DAI tokens as loans.
However, if the borrowers of the loan try to recover the locked ETH coin, they will need to return their DAI to the Maker Protocol. Moreover, they will also have to pay an added fee. Additionally, when it comes to liquidation, the Maker Protocol software takes the collateral of the loan and sells it by using an internal market-based auction mechanism.
In addition to that, the design of the DAI network is such that no other party can alter the DAI supply in the network. Basically, the network maintains it through a system of smart contracts. Again, the unique design of the network enables it to respond dynamically to various market changes and also the price of assets in contracts.
A Brief History of DAI Crypto
The most interesting aspect of DAI is that no single person or a small group of co-founders created the DAI network. Here, both MakerDAO and Maker Protocol governs the software that powers the development of DAI and also overlooks the issuing of new tokens.
According to Kraken, “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.”
However, with time, the Maker Foundation gave up control of the Maker Protocol software to MakerDAO. MakerDAO is an autonomous decentralized organization. Such types of organizations run themselves on their own in a decentralized manner. Here, they make use of smart contracts (agreements through software code) and execute them on the Ethereum blockchain.
The holders of holders of Maker (MKR) governance tokens manage MakerDAO democratically. Here, these tokens act similar to a traditional stock of a company. Furthermore, the holders of MKR tokens can also vote on certain key decisions on the development of MakerDAO, DAI, and the Maker Protocol. However, the voting power of the holders is proportionate with the amount of MRK tokens they hold.
Nevertheless, it is essential to know that DAI was not the first stablecoin in the world of cryptocurrency. However, it is one of the most successful ones.
How Does DAI Crypto Work?
According to the Corporate Finance Institute, “DAI is one of the most successful projects on the Ethereum blockchain network, holding 2% of all the Ether coins in the network within MakerDAO smart contracts. Maker has seen a consistent 20% month-on-month growth in the use of DAI tokens. The majority of users, more than 70%, spend their DAI tokens quickly after acquiring them.”
In normal cases, MakerDAO invites traders and enables them to earn interest on DAI crypto if they hold them in the MakerDAO bank. Here, the MakerDAO platform acts as a credit processing facility, where the stability fees act like interest rates.
When the fees are low, people will be able to lock up more Ether coins. However, when the costs rise, people can close their CDPs. Furthermore, the value of the DAI coin also changes with market fluctuations and preferences because by opening new CDPs, one can generate DAI tokens.
Generating and Withdrawing DAI
The following are the major steps with which you can generate and withdraw DAI coins on the DAI crypto platform:
1. As a trader, you must first deposit ETH coins (of the Ethereum network) or any other crypto into a Maker DAO smart contract. Some common coins that MakerDAO accepts include BAT, TUSD, USDC, MANA, and ZRX.
2. After you deposit crypto into a smart contract with the Maker Protocol, it creates a CDP (Collateralized Debt Position). This CDP helps in the creation of DAI crypto, as it locks collateral into the maker’s smart contract to produce DAI stablecoin. Here, the value of the collateral in CDP needs to be more than 150% of the value of DAI tokens which was created using collateral.
3. Now, you have to unlock this collateral value and want to recoup the value of the smart contract. To do this, you must consider paying back the equivalent value of the DAI from your collateral, along with stability fees. Hence, you will be able to ensure that there is enough capital to support the value of the withdrawn money.
4. Suppose the initially deposited collateral value that you use to generate DAI tokens sinks below 150% of the generated DAI. Then, you can sell the locked collateral. Hence, you can use the proceeds of the sale to cover the costs of the DAI that you generate. Furthermore, you can also use the proceeds for penalty liquidation and stability fees.
DAI Savings Rate
The Maker Protocol also offers a DAI Savings Rate. Hence, when the value of the crypto rises, this rate enables the holders of DAI tokens to lock up their DAI and earn interest as the value of the crypto rises. Furthermore, the DAI token holders pay a stability fee when they are withdrawing DAI from MakerDAO. This fee helps to back this interest rate.
What Is Collateralized Debt Position?
According to Coin Market Cap, “A collateralized debt position (CDP) is the position created by locking collateral in MakerDAO’s smart contract to generate its decentralized stablecoin, DAI. This system was introduced to the decentralized finance world by the MakerDAO team and is how its decentralized stablecoin DAI is created. The value of the collateral locked in a CDP needs always to exceed 150% of the value of DAI that it was used to generate.”
In regards to the Maker Protocol, CDPs include smart contacts that DAI users can use to lock their collateral assets (like ETH coin) and generate more DAI. You can consider a CDP as a vault that you use to store collaterals. However, if there is volatility in the crypto collateral, there is over-collateralization. In this case, the amount you need to deposit is generally higher than the DAI value.
On the other hand, if you want to recover the stored ETH, you will need to return DAI and pay stability fees.
What Is the Utility of DAI Crypto?
Binance explains, “There are two versions of Dai: Single-Collateral Dai (SAI) and Multi-Collateral Dai (MCD). SAI was initially backed only by Ethereum, had a fixed stability fee, and used automatic liquidation. MCD can be backed by multiple types of collateral, has a more flexible stability fee, and uses a keeper system for liquidation. SAI has been replaced by MCD and is no longer being developed or supported. SAI holders were able to migrate to MCD.”
The biggest utility of DAI is that it is a stablecoin. It offers traders a powerful tool to avoid volatility, which is often the case with cryptocurrencies. Generally, the open market affects the prices of cryptos.
Furthermore, DAI also helps to remove transaction costs and delays that might happen due to trade execution within the crypto market. However, these delays happen while using government currencies that move between banks, and delay optimum execution.
Apart from that, DAI also allows you to access loans in such a way that you have advantages over existing options. Here, no bank or financial institution evaluates the credit. Rather, the DAI users put up ETH on the platform as collateral and receive DAI in return. However, when they decide to repay the loans, they have to pay an additional fee.
How Can DAI Crypto Be a Good Choice For You?
A major factor that makes users interested in DAI is its ability to offer the efficiency and transparency benefits of crypto. Furthermore, it also provides a convenient alternative place for holding funds when a user might be struggling with the volatility of crypto assets.
On the other hand, like other types of cryptocurrencies, stablecoins are without borders and programmable. Moreover, you can easily transfer stablecoins at a low cost. Hence, stablecoins are valuable alternatives to conventional financial institutions.
However, like other crypto options, you cannot trade DAI. You can generate it only when you take a collateral loan from the DAI platform. These DAI coins burn out when you pay back the loans.
Advantages and Disadvantages of Choosing DAI Crypto
One of the major disadvantages of DAI crypto is that it might not work after 5-6 years. Here, once you repay the loan, the coins are sent to burn. The coins largely depend on the loans that you take from the MakerDAO platform.
However, there is stability with the coin, and in recent times, it has become popular, too. Furthermore, there are certain transactional benefits of the coin. Apart from that, due to its soft association with the USD, the value of the currency remains equal to $1.
On the other hand, there are advantages for lenders due to the burning aspect of the crypto. Here, they get the relief that there are no third parties involved in the processing of the loan. Hence, the lender does not have to incur extra charges.
Wrapping Up
Hope this article was helpful for you to get a better idea of DAI Crypto and how it works. It is a collateralized debt token that is available when you take a loan from the MakerDAO platform. Here, you have to keep your ETH coins as collateral. This way, you can earn DAI coins. This factor offers it security and stability.
Do you have more information to add about DAI crypto? Consider sharing your ideas and opinions in the comments section below.
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