Educational Post

What’s DAI?

DAI is a cryptocurrency categorized as a stablecoin. It aims to keep its value consistent with the U.S. dollar at a 1:1 ratio. It has its own decentralized governing organization, MakerDAO, to regulate its value. It was one of the first to successfully transition from a company to a decentralised autonomous organisation (DAO).

Users can generate DAI through the Maker Protocol, a system that leverages locked up collateral to generate the token. Users can use other cryptocurrencies as collateral or buy DAI using traditional fiat currencies on cryptocurrency exchanges like Coinbase.

What makes DAI different?

A framework of self-executing smart contracts autonomously controls the price of DAI. If DAI's price deviates from USD, MakerDAO's algorithms will create or burn tokens to stabilize DAI's price.

As a result, DAI's stability is not dependent on a single party. An effective algorithm benefits token holders since burnt tokens increase the value of existing ones. This system has seen DAI maintain a relatively stable value for over six years.

How does DAI work?

DAI's value remains relatively stable due to stored collateral that backs up its value. For every $1 of DAI, there is more than $1 of other cryptos that back it. As a result, DAI holds value. Other cryptocurrencies act as collateral for DAI to maintain this value against the US dollar. DAI uses Ethereum (ETH) and other Ethereum-based cryptos as collateral and smart contracts on the Ethereum blockchain.