What is Dai?

Milad Mirshahi27/07/2021

DAI is a decentralized cryptocurrency that aims to maintain a stable 1: 1 value against the US dollar. 1 DAI must therefore be the same as 1 USD. DAI is thus a so-called "stablecoin". Stablecoins can be called "crypto-versions" of traditional currencies such as USD, EUR or NOK. There are several reasons why you want to use these cryptocurrencies, and this is especially related to the fact that the value remains stable so that you are protected against the typical large price fluctuations that other cryptocurrencies often have.

Important facts about DAI

DAI is technically an Ethereum-based application built on the Ethereum blockchain.
DAI always falls under the category of stable cryptocurrencies, also known as stack coins. A stable cryptocurrency, or stablecoin, is a cryptocurrency that is linked to another stable asset class such as the dollar, pound or gold.
Because DAI is a cryptocurrency created on the Ethereum blockchain, DAI can be stored and transferred directly to anyone, anywhere in the world, without going through third parties such as banks or other central institutions.There are a number of other stable cryptocurrencies that have a stable 1: 1 value pegged to a US dollar. The most well-known stable cryptocurrency is Tether. Tether has a reserve of actual US dollars, bonds and other securities that will "back up" every single unit of tether that exists, and is controlled by a centralized organization. USDC (US Dollar Coin) is also a very well known stack coin and works in the same way. You can see an overview of different stack coins here. Du kan se en oversikt over ulike stablecoins her.
Unlike Tether and the majority of other major stable cryptocurrencies, DAI is decentralized, which means that no centralized organization controls the supply of new DAIs in circulation.
Because the crypto market can be volatile, it is common to use DAI to protect against market fluctuations.
DAI is also widely used in services that offer decentralized loans and interest-bearing funds.

Who made DAI?

In 2014, Danish Rune Christensen launched an open-source project by name MakerDAO.

In 2015, Christensen gathered a group of developers and formed MakerDAO's protocol. Maker Protocol became a solution that made it possible to take out loans with cryptocurrency as security.

In 2017, DAI was launched on Maker Protocol through a smart contract on the Ethereum blockchain. The purpose of DAI was to make available a decentralized cryptocurrency that was not volatile, but which could also be used to take out loans with cryptocurrency as collateral.

Despite the fact that Christensen is the creator of MakerDAO, Christensen has given up ownership of the project to the Maker community.

MakerDAO is a decentralized autonomous organization run by people around the world who own MakerDAO's cryptocurrency, Maker (MKR).

Owners of MakerDAO's cryptocurrency have the right to vote and decide through a common agreement what will be the further development of MakerDAO's smart contracts - and with it also DAI.

Firi explains:

A smart contract is simply explained as a contract (agreement between two parties) that is stored in a blockchain as a data code. Smart contracts on Ethereum make it possible to automate the implementation of an agreement or contract without the involvement of a third party or that you need to have confidence in the other player you have a contract with.

How to buy DAI?

An easy and cheap way to buy and store DAI is through a crypto exchange such as Firi. Firi makes it easy to buy, sell and store your DAI and other cryptocurrencies.

When you create an account on a crypto exchange such as Firi, a digital wallet is automatically generated / stacked for you where you can store your DAI.

It is easy to store DAI with us. Firi securely stores your cryptocurrency for you and you do not have to deal with securing your own private keys and or taking care of the security of your digital wallet.

You can access your wallets by logging in to your user by e-mail or vipps, and by verifying yourself with BankID. You can easily send and receive cryptocurrencies to your wallet in Firi from other crypto exchanges or decentralized wallets.

Cryptocurrency can be purchased 24/7, and Firi makes it easy to switch between ether and NOK. In less than a business day, you can also sell your ether and several other cryptocurrencies for NOK to your bank account if you wish.

How does DAI work?

DAI is simply explained as a stablecoin (stable cryptocurrency) that has collateral in cryptocurrency, and which aims to maintain a stable 1:1 value against the US dollar.

What do you mean by collateral?

DAI's value is “secured” by having monetary values stored so that these can “back up” the DAI value. If you have 1 DAI in your crypto wallet, this value is represented by keeping values equivalent to 1 USD stored at Maker DAO. In theory, you should be able to exchange your DAI for values corresponding to the same amount. This is how you know that DAI is not just "fantasy money" that is created out of thin air.

Underlying security is required to maintain the value of the DAI pegged to the US dollar, and Ethereum (ETH) and a number of other Ethereum-based cryptocurrencies are used as collateral.

The smart contracts on which DAI is built belong to the Maker Protocol, which in practice is a decentralized protocol and application on the Ethereum blockchain. All DAIs are generated from a tool called Market Vaults:

The user deposits ETH or another supported cryptocurrency as security.
DAI is then generated
DAI is paid out to the user in the form of a loan
The user can give the same amount of DAI back and pay a small fee and get back their security.

To make this more understandable, you can compare it with taking out a loan from the bank, and in that context using your own home as security for the loan (so that you can prove that you can repay).

DAI is thus lent against a selection of Ethereum-based cryptocurrencies. When users receive DAI in exchange for Ethereum (ETH), one can use DAI in exactly the same way as other cryptocurrencies.

How to secure against people not repaying loans from DAI?

When you borrow DAI, you must provide at least 150% of the value as security. You thus unlock more money in security than the value of the loan. If the security falls below 150%, the security deposited is forcibly sold (liquidated) and the borrower is also deducted a small fee. As volatility is high in cryptocurrencies, there is a danger of being liquidated if such a high safety margin is not used.

Example:

If you want 100 DAI, which is equivalent to the value of 100 US dollars, you must deposit Ethereum worth at least 150 US dollars in Maker Protocol's smart contract. Should the $ 150 in Ethereum fall in value to, for example, $ 149 in Ethereum, the smart contracts in Maker Protocol will automatically sell the Ethereum that was used as collateral. In this way, the protocol ensures that the value you deposit as collateral will never be lower than the amount you borrow. It is therefore wise to have an extra margin to go on.

Why borrow DAI?

When you look at how DAI works, it may seem a little strange to borrow a lower amount by locking in a higher amount. It would be very strange to borrow NOK 1,000 from the bank by locking in NOK 1,500 as security.

But one of the main reasons why people borrow DAI with their cryptocurrency is a desire to have liquidity and money available without having to sell their cryptocurrency. DAI makes it possible for people to speculate in new cryptocurrencies without having to sell the cryptocurrencies you already have.

Another important reason why many people lock in cryptocurrencies and take out loans from DAI is that there are a number of interest-bearing funds that support DAI. In practice, this means that it is possible to earn annual interest on investing borrowed DAI in an interest-bearing fund. The interest you pay for the loan is thus lower than the interest you can earn by investing DAI in various other interest-bearing services. If the interest you receive exceeds the cost that comes with taking out the loan in DAI, you will in practice be able to make money by borrowing DAI.

Investing in funds with borrowed DAI is a common form of investment strategy that is often used in decentralized finance. The most popular low-risk funds are Aave and Curve, and high-risk funds are better known in the yield farming category.

Summary

The advantage of DAI is that you can use this cryptocurrency to protect yourself against the large price fluctuations in crypto. In addition, one can use DAI as a deposit in a number of services within decentralized finance and earn interest income on its crypto. Stablecoins such as DAI form an important part of the crypto market and enable new innovations and important functions in the crypto universe. If you want to read about how to buy DAI, you can click on the link below.

How to buy and store DAI in three easy steps.