What is Dai ?
Dai (or DAI) is a stablecoin cryptocurrency which aims to keep its value as close to one United States dollar (USD) as possible through an automated system of smart contracts on the Ethereum blockchain. Dai is maintained and regulated by MakerDAO, a decentralized autonomous organization (DAO) composed of the owners of its governance token, MKR, who may vote on changes to certain parameters in its smart contracts in order to ensure the stability of Dai.
Dai is created from an overcollateralized loan and repayment process facilitated by MakerDAO's smart contracts in the form of a decentralized application. Users who deposit Ether (or other cryptocurrencies accepted as collateral) are able to borrow against the value of their deposits and receive newly generated Dai. The collateralization ratio for Ether is currently set at 150%, or in other words, depositing $150 worth of Ether allows one to borrow up to 100 Dai (roughly equivalent to $100). If the value of the collateral declines below this ratio, the loan can be automatically liquidated by the smart contracts. On the other hand, if its value increases, additional Dai can be borrowed.
Consequently by repaying a loan and its accrued interest, the returned Dai is automatically destroyed and the collateral is made available for withdrawal. In this way the USD value of Dai can be said to be backed by the USD value of the underlying collateral held by MakerDAO's smart contracts. By controlling the types of accepted collateral, collateralization ratios, and the interest rates for borrowing or storing Dai, MakerDAO is able to control the amount of Dai in circulation, and thus its value.
The power to propose and implement changes to such variables is granted, through code, to holders of the MKR token. Owners of the governance token are able to vote on proposed modifications in equal proportion to the amount of tokens they hold. The MKR token also serves as an investment in the MakerDAO system. Added interest that borrowers pay back, on top of their loan's principal, is used to buy up MKR tokens from the market and burn them (i.e. destroy, permanently take out of circulation). This mechanism aims to make MKR deflationary in correlation to the revenues from lending Dai.
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.
Primary features of Dai.
- Dai is developed on top of Ethereum as per the valuations of the US dollar.
- Value of Dai crypto is limited to 1 US dollar. That means they are following a 1 to 1 ratio.
- Smart contracts manage the issuance of tokens. They are permanently kept on the blockchain and can’t be changed.
History Of DAI
MakerDAO was formed in 2014 by Danish entrepreneur Rune Christensen.
On December 18, 2017, Dai and its associated smart contracts were officially launched on the main Ethereum network. The price of Dai was successfully kept close to one US dollar during its first year of existence, even though the price of Ether, the only collateral available at the time, declined by more than 80% during the same time period.
In September 2018, venture capital firm Andreessen Horowitz invested $15 million in MakerDAO by purchasing 6% of all MKR tokens.
In 2018, MakerDAO formed the Maker Foundation, run from Copenhagen, which serves to help bootstrap the ecosystem by, for example, writing code needed for the platform to function and adapt.
In 2019, MakerDAO experienced internal struggle over whether it should integrate more with the traditional financial system. Christensen wanted greater regulatory compliance to allow for assets besides cryptocurrency to serve as collateral for Dai. The struggle led to the departure of MakerDAO's CTO.
In March 2020, as a result of extraordinary market volatility at the onset of the COVID-19 pandemic, Dai experienced a deflationary deleveraging spiral that, at its peak, caused it to trade for up to USD $1.11 before returning to its intended $1.00 valuation.
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.
About MakerDAO
MakerDAO is an open-source project on the Ethereum blockchain and a Decentralized Autonomous Organization1 created in 2014. The project is managed by people around the world who hold its governance token, MKR. Through a system of scientific governance involving Executive Voting and Governance Polling, MKR holders manage the Maker Protocol and the financial risks of Dai to ensure its stability, transparency, and efficiency. MKR voting weight is proportional to the amount of MKR a voter stakes in the voting contract, DSChief. In other words, the more MKR tokens locked in the contract, the greater the voter’s decision-making power.
About the Maker Protocol
The Maker Protocol, built on the Ethereum blockchain,2 enables users to create currency. Current elements of the Maker Protocol are the Dai stablecoin, Maker Collateral Vaults, Oracles, and Voting. MakerDAO governs the Maker Protocol by deciding on key parameters (e.g., stability fees, collateral types/rates, etc.) through the voting power of MKR holders.
The Maker Protocol, one of the largest decentralized applications (dapps) on the Ethereum blockchain, was the first decentralized finance (DeFi) application to earn significant adoption.
About the Maker Foundation
The Maker Foundation, which is part of the global Maker community, built and launched the Maker Protocol in conjunction with a number of outside partners. It is currently working with the MakerDAO community to bootstrap decentralized governance of the project and drive it toward complete decentralization.
About the Dai Foundation
The Dai Foundation, based in Denmark, is self-governing and independent of the Maker Foundation. It was formed to house the Maker community's key intangible assets, such as trademarks and code copyrights, and it operates solely on the basis of objective and rigid statutes that define its mandate. Its purpose, as noted in the Dai Foundation Trust Deed, is to safeguard what cannot be technologically decentralized in the Maker Protocol.
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