Dai

Managed by the MakerDAO decentralized autonomous organization and the Maker Protocol, DAI is a stablecoin built on Ethereum. Its value is soft-pegged to the U.S. dollar, backed by a variety of cryptocurrencies locked in smart-contract vaults whenever new tokens are created.

It is crucial to distinguish this from Single-Collateral DAI (SAI), a predecessor that relied on just one cryptocurrency for collateral and did not offer the DAI Savings Rate, a feature enabling holders to earn interest. The Multi-Collateral DAI version went live in November 2019.

DAI is distinct in that it lacks a single founder or small founding team. Its software development and token issuance are instead overseen by the MakerDAO and Maker Protocol.

MakerDAO operates as a decentralized autonomous organization, functioning like a self-running company through smart contracts—code-based agreements executed on the Ethereum blockchain.

The organization is democratically controlled by holders of Maker (MKR) governance tokens, which resemble traditional stock. These holders vote on major decisions concerning MakerDAO, the Maker Protocol, and DAI, with voting influence determined by the quantity of MKR tokens they possess.

Danish entrepreneur Rune Christensen originally established MakerDAO in 2015. Prior to launching the Maker ecosystem, Christensen studied biochemistry and international business in Copenhagen and started the Try China international recruiting firm.

Dai holds the position of the second-largest decentralized stablecoin by market capitalization, a spot it recently lost to Terra’s native stablecoin, UST. While leading stablecoins such as USDT, USDC, and BUSD rely on traditional assets like cash, corporate bonds, U.S. treasuries, and commercial papers (with USDT facing heightened scrutiny), both Dai and UST are backed by cryptocurrencies and pegged to the Dollar. Specifically, Dai is a collateral-based cryptocurrency that maintains a soft peg to the U.S. dollar.

To generate Dai, users must deposit crypto-assets into Maker Vaults on the Maker Protocol. Access to the protocol and Vault creation is available through Oasis Borrow or other community-built interfaces. On Oasis Borrow, users can lock collateral including ETH, WBTC, LINK, UNI, YFI, MANA, MATIC, and others. They may then borrow Dai against this collateral, provided they stay within the required collateral ratio. This ratio ranges from 101% to 175%, varying according to the risk level of the locked asset.

DAI stands out primarily because of its soft peg to the U.S. dollar. Given that the cryptocurrency market is known for extreme volatility—with major, liquid assets like Bitcoin often seeing daily price swings of 10% or more—traders and investors frequently seek stablecoins as safe-haven assets to buffer against these fluctuations. DAI serves this role by linking its value to stable traditional fiat currencies, such as the USD or EUR.

A further distinct feature is that DAI is not controlled by a private entity. Instead, it is operated by a decentralized autonomous organization through a software protocol. This means that every creation and destruction of tokens is handled and publicly logged by self-enforcing smart contracts on Ethereum, which enhances transparency and reduces the risk of corruption. Additionally, the development of the DAI software follows a democratic model, allowing regular participants in the ecosystem to govern decisions through direct voting.

Unlike Bitcoin (BTC) and Ethereum (ETH), new DAI tokens are not created through mining. They are also not issued by a private entity following its own policies, as is the case with Tether (USDT). Rather, any individual can mint new DAI using the Maker Protocol.

Operating on the Ethereum blockchain, the Maker Protocol is the software responsible for managing DAI issuance. To keep the soft peg to the U.S. dollar stable, the protocol guarantees that each DAI token is backed by a sufficient quantity of other cryptocurrencies. Users facilitate this by depositing crypto assets into a vault—a smart contract on Ethereum—which serves as collateral for minting an equivalent amount of new DAI.

The total supply of DAI has no maximum cap; it is dynamic and fluctuates based on the volume of collateral held in vaults at any specific time. As of November 2020, approximately 940 million DAI were in circulation.

Because DAI is an ERC-20 token built on Ethereum, its security relies on the Ethash algorithm used by the Ethereum network.

You can acquire DAI tokens through a variety of online venues. These options encompass:

• Decentralized Finance (DeFi) token swap protocols
• Traditional cryptocurrency exchanges

DAI was the first stablecoin of its kind, but it lost ground to new competitors during the last bull market, particularly Terra's UST (now known as TerraClassicUSD). Unlike DAI, UST was an undercollateralized, algorithmic stablecoin pegged to the U.S. dollar. Due to its algorithmic structure and lack of sufficient collateral, neither the stablecoin nor the underlying Terra token (now TerraClassic) could withstand a severe sell-off. Consequently, the whole Terra ecosystem collapsed, erasing more than $18 billion from UST's $18.6 billion market cap.

This UST downturn significantly affected other stablecoins, DAI included. While DAI kept its USD peg, its market capitalization fell sharply from $8 billion to $6.33 billion. After the token stabilized, demand for DAI rose, eventually driving its price to a premium slightly above $1.

Although the UST crash challenged the credibility of algorithmic stablecoins, DAI's performance during this period suggests that decentralized stablecoins may still have a future. This event also underscores the critical role of over-collateralization for stablecoins.