DAI is one of the largest stablecoins on the market today. With (at the time of writing Feb 4, 2022) a market cap of nearly $10 billion and a daily trading volume of over $200 million, it is arguably a stablecoin of stature. .
This could be due in part to the fact that DAI is a fairly unique stablecoin. Most stablecoins use a “static” collateral. For example, look at Tether: for every USDT there would be 1 US dollar in a vault. Although people have a lot of questions about the legitimacy of Tether and lawsuits are now pending, it sounds like a good model on the surface.
However, it can also be done differently, for example as with DAI. There, the loans ensure that the DAI value always has collateral that represents the same value. But how exactly does this work? And is this safe? You can read that and more on this blog. Let’s fast forward!
What is DAI?
DAI is a stable coin which was marketed by MakerDAO. MarkerDAO is a DAO (decentralized autonomous organization) on the Ethereum blockchain. This means that MakerDAO is managed by users. By owning the governance token (MKR), they can vote on what happens with the platform.
MakerDAO makes it possible for users to lend or borrow cryptocurrency without the need for a middleman. This is done in a completely decentralized way.
One of the MakerDAO projects is the DAI stablecoin. DAI is one of the most well-known stablecoins on the market right now. At the time of writing (February 4, 2022), DAI ranks 19th on the list of largest cryptocurrencies (by market cap) and is the 5th largest stablecoin on the market (by market cap).
DAI is a stable coin, which means that the value of DAI is always close to $1. DAI may be worth $0.99 or $1.01, but much more than that, DAI will never deviate from $1.
Often stablecoins can be worth $1, because there is some kind of vault for the stablecoin. This vault contains exactly the value it takes to hold $1 for each stablecoin. When the market capitalization of such a stablecoin exceeds $100,000,000, you can assume that there is a vault somewhere with $100,000,000. For example, this safe can consist of real US dollars, as is the case with Tether (USDT), but it can also consist of other cryptocurrencies, such as TerraUSD (UST), because the safe consists of Terra (LUNA) and Ethereum ( ETH). ). .
However, this works differently on DAI.† But how?
How does IAD work?
Therefore, DAI works completely differently than most stablecoins. As explained above, MakerDAO, the creator of DAI, is a platform on the Ethereum network that allows you to lend or borrow cryptocurrencies. To properly understand how DAI works, it’s crucial to know what MakerDAO does.
DAI tokens are created when someone applies for a loan, secured, with MakerDAO† This collateral later, during the loan, actually serves as collateral for the stablecoin as well.
Suppose I take a loan with 1 ETH as collateral (at the time of writing $2,805.20), then I put 1 ETH, so to speak, in the vault, which represents the DAI collateral. Now $2,805.20 in DAI is withdrawn, which in most cases is 2,805.20 DAI. So when I pay the loan, they give me back my 1 ETH, as long as you pay everything correctly. This also means that 1 ETH disappears from the DAI ‘collateral vault’. This also means that 2,805.20 DAI are burned†
So just like with other stablecoins, there is actually some kind of vault that represents the value of DAI. However, there is a very logical system in DAI, which ensures that this value is always adjusted in response to changes in the vault.
The advantage of this is that the value of the vault is always almost exactly equal to the value of the stablecoin. Both are constantly equated by the burning and mints that take place there.
This is different from a stablecoin like TerraUSD. As mentioned above, the TerraUSD vault consists of LUNA and ETH. The downside of this may be that this value crashes suddenly. Imagine that LUNA and ETH suddenly do -80% in a bear market, then you still have the amount of UST left, which are created based on the value of the previous vault. So he actually has 400% more UST than he should have at the time. This can cause the stablecoin to lose its parity, because the collateral almost suddenly disappears, which could cause the stablecoin to hit a price of, say, $0.20.
The advantages and disadvantages of DAI
Let’s take a look at the pros and cons of the DAI stablecoin. First the pros and then the cons.
The first advantage of DAI is that the DAI guarantee is theoretically always equal to the value of DAI† This is because the value of DAI is constantly adjusted for collateral, which is constantly changing. We say theoretically, because something can always go wrong in the future. This has not happened in the past.
Another advantage is that there no other party that can adjust the offer, and therefore the price, of DAI† The only way the offer can be customized is through the loans provided through MakerDAO. This ensures that the adjustments in the offer are always completely transparent and that you can always check based on which loans have been implemented.
Another advantage of DAI is that the offer not only enlarged, but also reduced It can be. This is possible thanks to certain smart contracts, which serve as a kind of recording mechanism. The DAI tokens are then sent into a contract, which they can never get out of, so they are taken out of circulation.
Of course not everything is positive. One disadvantage is that DAI not the biggest stablecoin it is. Although the 5th largest sounds pretty good, you basically only need 1 stablecoin to trade crypto. This is why exchanges often only make 1, or sometimes 2 or 3 stablecoins available in trading pairs. So there are many exchanges where you cannot use DAI.
There’s also a lot of competition when it comes to stablecoins. There are many different stablecoins available and as far as we know other stablecoins are also safe and usable. Therefore, it is quite difficult for a stablecoin like DAI to compete with this.
Why does it matter which stablecoin you have?
You may be wondering ‘What difference does it make which stablecoin I own? Surely each stablecoin is worth $1, so there’s no difference at all, right? While that’s not a crazy idea at all, it’s not entirely true. This is mainly due to 2 reasons.
Is first that is, it is very important that your stablecoin does not lose its stability. Pegging a stablecoin is basically how the stablecoin remains worth $1. In the case of DAI, this is the dynamic collateral, but in the case of Tether, the static collateral. However, these are not the only options for a stablecoin to maintain its $1 value. For example, you also have algorithmic stablecoins, which do this via an algorithm in a smart contract, but that’s for another time.
In any case, the important thing is that you have faith in the peg of the stable coin that you have. When you lose your parity, you can simply go to $0.00. For example, there is a lot of controversy surrounding Tether (USDT). There are rumors that the Tether vault cannot reach the market capitalization at all. There are also lawsuits for this. If it turns out that this is really the case, it may be that Tether loses its stability. Imagine that you have a lot of Tether at that moment, so you think that nothing can happen to your money, because you have it in stable coins. However, even in such a case, it can go wrong and lose your money.
One second reason Choosing one particular stablecoin, over another, is because of the number of trading pairs the stablecoin has. If you’ve been to a crypto exchange like Binance or Kucoin, you’ve probably seen that you can buy just about anything if you own USDT. Almost every coin and token has a trading pair with USDT on almost every exchange, simply because it is the most widely used stablecoin. This means that when you have USDT, you can buy almost any cryptocurrency. This is of course an advantage. For example, if you look at another stablecoin like BUSD, you will see that you can trade it on Binance with just about anything, but not on Kucoin or Huobi. DAI is also not available everywhere, for example you cannot use it through Kucoin and Huobi.
So there are always reasons to choose a certain stablecoin over another. First for safety. Some stablecoins could actually lose their peg to the $1 and thus you could lose your money that you thought was safe. Second for usability. With one stablecoin you can buy much more crypto than with the other stablecoin. So which stablecoin you think is best is up to you. Our advice that we can always give you is to spread your risk. If it happens that one of your stablecoins loses its parity, in any case, you will not lose everything right away.
Today we review the stablecoin DAI, from MakerDAO. This is a special stablecoin. Instead of a ‘static’ guarantee, DAI uses a ‘dynamic’ guarantee.
DAI is controlled through MakerDAO. MakerDAO is a platform that allows you to obtain loans in cryptocurrencies, but also to lend cryptocurrencies in a fully decentralized way. When you take out a crypto loan with MakerDAO, you need to put up collateral for this, for example 1 ETH. This guarantee then ends up in the DAI safe. The amount of DAI representing the value of 1 ETH is then minted and put into circulation.
When the loan is subsequently repaid, the collateral, in this case 1 ETH, disappears from the vault. This also ensures that the amount of DAI, which represents the value of this 1 ETH, is burned and thus removed from circulation.
In this way, the DAI guarantee is theoretically always equal to the value of DAI. Many people think that this is a real advantage for DAI, because they believe that the collateral of the stablecoin offers a little more security than that of other stablecoins, such as TerraUSD or Tether. This is also because, for example, the blockchain shows exactly which loans are provided and thus whether the collateral remains (almost) equal to the stablecoin’s market cap.
Hopefully today we were able to teach you something about the DAI stablecoin, a stablecoin that chooses a slightly different path than most other stablecoins. Do you still have questions? Then put them in our AllAboutCrypto Facebook Group where our experts are there for you. Plus, you’ll join a community of over 100,000 crypto fans! You can also find answers to your questions in our frequently asked questions. You can also quickly find answers by Googling your question + AllesAboutCrypto.