DAI Things You Need To Know Before Investing

Riya KapoorMay 12, 2022

3 minutes read

DAI Things You Need To Know Before Investing

Table of Contents

What Is DAI?

DAI is an Ethereum-based stablecoin (stable-price cryptocurrency) whose issuance and development are managed by the Maker Protocol and the MakerDAO decentralized autonomous organization.

The price of DAI is soft-pegged to the U.S. dollar and is collateralized by a mix of other cryptocurrencies that are deposited into smart-contract vaults every time a new DAI is minted.

It is important to differentiate between Multi-Collateral DAI and Single-Collateral DAI (SAI), an earlier version of the token that a single cryptocurrency could only collateralize; SAI also doesn’t support the DAI Savings Rate, which allows users to earn savings by holding DAI tokens.

Multi-Collateral DAI was launched in November 2019.

Who Are the Founders of DAI?

One of the defining features of DAI is that it wasn’t created by any single person or a small group of co-founders. Instead, the software development that powers it and the issuance of new tokens is governed by the MakerDAO and Maker Protocol.

MakerDAO is a decentralized autonomous organization — a kind of company that runs itself in a decentralized manner via smart contracts — self-enforcing agreements expressed in software code and executed on the Ethereum blockchain.

This organization is managed democratically by the holders of its Maker (MKR) governance tokens, which act similarly to a traditional company’s stock; MKR holders can vote on key decisions regarding the development of MakerDAO, Maker Protocol, and DAI, with their voting power being proportionate to the number of Maker tokens they own.

MakerDAO itself was originally founded by a Danish entrepreneur Rune Christensen in 2015. Before starting work on the Maker ecosystem, Christensen studied biochemistry and international business in Copenhagen and founded the Try China international recruiting firm.

How to Generate Dai?

Dai is the second-largest decentralized stablecoin by market capitalization, having been flipped recently by Terra’s native stablecoin — UST. Both are backed by cryptocurrencies and pegged to the Dollar, while the top stablecoins like USDT, USDC, and BUSD are backed by traditional assets such as cash, corporate bonds, U.S. treasuries, and commercial papers (which have come under increased scrutiny in the case of USDT). So what exactly is Dai backed by? The Dai stablecoin is a collateral-based cryptocurrency soft-pegged to the U.S. dollar. Users generate Dai by depositing crypto-assets into Maker Vaults on the Marker Protocol. Users can access Maker Protocol and create Vaults through Oasis Borrow or other interfaces built by the community. On Oasis Borrow, users can lock in collateral such as ETH, WBTC, LINK, UNI, YFI, MANA, MATIC, and more. Users can then borrow against their collateral in Dai, as long as it is within the collateral ratio, which ranges from 101% to 175%, depending on the risk level of the asset locked.

What Makes DAI Unique?

DAI’s main advantage lies in its soft peg to the price of the U.S. dollar.

The crypto market is notorious for its volatility, with even the largest, highly-liquid coins such as Bitcoin sometimes experiencing price changes (both up and down) of 10% or more within a single day. Under these circumstances, traders and investors are naturally predisposed to add safe-haven assets to their portfolios, whose stable price might help offset significant market fluctuations.

One such kind of asset is stablecoins, of which DAI is one example. These are cryptocurrencies whose price is pegged to assets with a relatively stable value — most commonly traditional fiat currencies, such as USD or EUR.

Another key advantage of DAI is that it is managed not by a private company but rather by a decentralized autonomous organization via a software protocol. As a result, all instances of issuance and burning of tokens are managed and publicly recorded by Ethereum-powered self-enforcing smart contracts, making the entire system more transparent and less prone to corruption.

In addition, the process of developing DAI software is governed more democratically — via direct voting by the regular participants of the token’s ecosystem.

How Many DAI Coins Are There in Circulation?

New DAI tokens are not produced via mining like Bitcoin (BTC) and Ethereum (ETH), nor are they minted by a private company according to its issuance police like Tether (USDT). Instead, the new DAI can be minted by any user via Maker Protocol.

Maker Protocol, which runs on the Ethereum blockchain, is the software that governs DAI issuance. The Maker Protocol ensures that an appropriate amount of other cryptocurrencies collateralizes every DAI token to maintain the soft price peg to the U.S. dollar. The Protocol allows users to deposit their crypto into a so-called vault — a smart contract on the Ethereum blockchain — as collateral and mint a corresponding amount of new DAI tokens.

There is no upper limit on the total supply of DAI — the supply is dynamic and depends on how much collateral is stored in the vaults at any given moment. As of November 2020, there are around 940 million DAI in circulation.