What is Dai?
Dai (DAI) is an Ethereum token stablecoin whose value is always pegged to roughly $1 USD. Unlike most other stablecoins, it is not backed by a reserve of fiat currency that equals the total number of its units in circulation but Collateralized Debt Position (CDP) smart contracts. In essence, anyone can contribute collateral to the Dai system and exchange them for Dai tokens, each of which will always have the value of $1 USD. This is made possible through coordination by the Maker DAO Ethereum platform which uses a combination of automation and manual, democratically decided adjustments to the governance of its collateral holdings.
History of Dai
The idea behind Dai stems from the creation of lead developer Rune Christensen, Maker DAO, which had an enormously successful ICO in 2016. Maker was announced in August 2015 as the “first tradeable token on the Ethereum network” and raised funds by issuing MKR tokens for BTC and ETH through its own exchange, before the launch of the Maker platform in April 2016. The original idea was to create a “centralized decentralized” bank for Ethereum, the cornerstone of which would be a dollar-pegged asset. The first Dai were created in December 2017 and the project has since gained a large amount of traction, moving into the top 100 coins by market cap in the third quarter of 2018.
How Dai Works
Dai uses a complex system of smart contracts, guided by the functions of Maker DAO, in order to keep the value of its token stabilized and pegged to the value of $1 USD. In order to fund the creation of new units of Dai, users put collateral in the form of Ethereum and other Ethereum tokens into the Maker DAO system, which are then managed and traded by autonomous processes as well as by governance provided by a body of human electorates. Electorates are rewarded for providing correct guidance that maintains the stability of Dai and punished if Dai becomes too far removed from the value of which it is supposed to be pegged. Anyone can make new Dai by adding a CDP to Maker DAO, which can then be traded and used just as any other cryptocurrency would. Dai can also be removed from circulation in exchange for a proportional amount of capital back to the CDP holder upon request.
As a stablecoin, Dai has many benefits not enjoyed by most other cryptocurrencies and also has a unique status among other stablecoins. Some of these benefits include:
DAO guidance. Dai uses a digitally autonomous organization (Maker) in order to provide its governance, meaning its oversight body is decentralized and it is not reliant on third parties to keep careful audits of a tremendous amount of capital which serves to back its value (unlike Tether and TrueUSD).
Universal participation. Unlike with its competitors, anyone can obtain their own Dai by creating a CDP via Maker, meaning regulatory adherence measures such as KYC and AML are not necessary requirements to obtain it.
ERC20 compliant token. As an Ethereum-based token, Dai enjoys all the benefits of security, speed of transacting and widespread compatibility provided by the Ethereum Network.