It is created and governed by the Maker DAI. It is one of the largest stablecoins in terms of market capitalization.
What is a stablecoin?
A stablecoin is a digital asset pegged to the value of a fiat currency. These currencies are usually backed by institutions that hold an equal amount of fiat currency as collateral. For example, if an organization issues 10,000 stablecoins pegged to the US dollar, it must hold $10,000 in reserve that can be used as collateral.
Some institutions also own other assets equal to the value of the fiat currency to which the stablecoin is pegged.
Fiat-backed stablecoins. These coins are backed by fiat currencies such as US dollars, pounds sterling and euros. The value of a stablecoin is equal to the fiat currency to which it is pegged.
Commodity-backed stablecoin: Some institutions hold commodities, such as gold, instead of fiat currencies. In this case, the value of a stablecoin is equal to one unit of this commodity (i.e. one ounce of gold).
Uncollateralized stablecoins: The value of uncollateralized stablecoins is maintained using smart contracts. The smart contract maintains a balance between supply and demand to set the price of the stablecoin.
Stablecoins backed by cryptocurrency. Unlike other stablecoins, cryptocurrency-backed stablecoins have a ratio instead of. These coins use trusted cryptocurrencies such as Bitcoin and Ethereum as collateral. DAI is one of the most popular cryptocurrency-backed stablecoins created on the Ethereum network.
What is DAI coin?
DAI is an Ethereum-based stablecoin pegged to the US dollar. The DAI coin is based on open source software that allows cryptocurrency holders to borrow and lend money while locking up their crypto assets. The DAI coin is backed by several cryptocurrencies and its value is indirectly pegged to the US dollar.
DAi plays an important role in absorbing cryptocurrency volatility, especially when there is downside risk. The DAI lending process is somewhat similar to traditional secured loans. Users can earn DAI tokens by locking their ETH or other crypto assets in a smart contract.
The lender may sell these assets through an auction mechanism in the domestic market if the terms of the contract are not met. Likewise, borrowers can get their crypto assets back by returning DAI tokens whenever they want. They must pay a fee while they recover their assets.
How does DAI work?
DAI maintains its value through the use of a Target Rate Feedback Mechanism (TRFM). TRFM increases when the price of DAI falls below $1. Investors are starting to invest in currencies to take advantage of falling prices. Thus, the price of the DAI token returns to $1 due to increased demand.
Now, even if the price of ETH falls by 20-25%, DAI will reliably guarantee the debt. Borrowers must pay a stability fee every time they want to recover their locked cryptocurrency.
DAI Token Use Cases
With a market capitalization of $9.4 billion, DAI is one of the leading stablecoins. There are currently 9.4 billion DAI tokens in circulation. It does not have a maximum quantity as users can create the desired number of DAI tokens by locking up their crypto assets.
Hedging: DAI helps absorb the volatility of cryptocurrencies, keeping their value at $1 in any situation.
Users can exchange it for fiat currency or use it to purchase certain products.
Passive Income: DAI token holders can lend their DAI deposits through Coinbase to earn a two percent return annually. This facility is available in countries such as the US, Australia, Spain, UK, France and the Netherlands.
Why is DAI the best stablecoin?
These currencies successfully retain their value over many years because they are backed by physical assets. Therefore, users cannot truly achieve decentralization using these tokens.
In contrast, DAI is a decentralized solution governed by smart contracts. No one can tamper with Dai coins and addresses.
Why is DAI popular in Defi?
DAI allows interaction between smart contracts as it is a decentralized cryptocurrency. According to the survey, more than 400 applications have integrated DAI. Using this protocol, users can exchange information between different Ethereum-based platforms.
How to get DAI tokens?
Users can generate DAI tokens directly through MakerDAO. Users receive credit in the form of DAI tokens when they request it. Once the loan is repaid, the DAI tokens are destroyed. Users can also purchase DAI tokens from different exchanges.