Whether you’re a crypto expert or beginner, we are sure that you’re aware of the fact that trading cryptocurrencies is an incredibly risky endeavor. Luckily, for those who want to keep some of their money in a crypto exchange and simply switch between different crypto assets without having to pay excessive cash-out costs and experience price fluctuations, they can do so by buying “stablecoins.”
Stablecoins allow traders the convenience of having money in an exchange that can be traded for other cryptocurrencies, while maintaining its value until they are traded. This is done by creating a cryptocurrency that is pegged to the value of a real currency.
Typically, stablecoins work as organizations back them by holding the actual asset they’ve pegged it to. Therefore, as an example, an organization that creates a stablecoin pegged to the US dollar can issue $100 million in coins valued at USD $1 each, by holding $100 million in the reserve.
As one of the most useful creations within decentralized finance (DeFi), DAI was created by MakerDAO, a decentralized autonomous organization (DAO), that has created an automated platform that allow users to borrow and lend money using cryptocurrencies by utilizing smart contracts that facilitate the loaning processes.
As a one-of-a-kind coin, DAI was built on the Ethereum blockchain as an ERC-20 token, and does not utilize the traditional method of pegging crypto to real assets to create a stablecoin, and differs itself from coins such as USDT and BUSD in 3 major ways.
While organizations such as Binance provide a stablecoin backed by a reserve of fiat assets maintained by a central institution, DAI is not issued by any individual entity. Instead, people interested in generating and borrowing DAI must deposit Ethereum-based assets into a smart contract that uses them as security to indirectly keep DAI tied to the US dollar.
Unlike most stablecoins that use a single physical or digital asset as collateral, DAI is collateralized against a combination of different cryptocurrencies, such as ETH, USDC, COMP, wBTC, BAT, and many more. The increasing quantity of collateralizable currencies lowers user risk and improves the price stability of DAI. The MakerDAO community continues to introduce new collateral options through voting, which users can be a part of by holding their native token, MKR. This provides users with a trustless system, and eliminates the need to rely on the promises of traditional stablecoin issuers.
Holders of DAI tokens get interest on their DAI. MakerDao’s native governance token, MKR, is used to establish the DAI Savings Rate and act as guarantors for DAI, which means their MKR tokens can be liquidated if the system crashes. This arrangement incentivizes guarantors to ensure the DAI system and its collateralized tokens run smoothly.
By taking advantage of these 3 main differences, DAI generators and holders have found a variety of clever ways to utilize their tokens. One clever example is using it to buy more tokens. Traders who are feeling bullish (optimistic) on ETH can buy and use it to generate DAI to buy more. Although it is risky, it is a good way to hodl more crypto!
In general, DAI offers a great deal of flexibility and utility, all while offering the price stability of the US dollar. Therefore, traders have found a number of ways to utilize DAI as a wealth preserving and growing mechanism that far surpasses the ability of traditional stablecoins, such as using it to:
To get DAI, you can either produce it yourself, or buy it on an exchange. Dai stablecoins are produced whenever a user takes out a loan on MakerDAO. Subsequently, it is “destroyed” once the loan is paid back. Thankfully, for people who are not interested in participating in the relatively complex workings of DeFi, DAI can be purchased on both centralized and decentralized exchanges, such as Binance or Gate.io.
Although creation of the Dai stablecoin was a huge turning point for DeFi, there are still several setbacks to it that have hindered its use on a more mainstream level, even amongst crypto enthusiasts. However, its characteristics has positioned it to potentially become the most commonly used and trusted stablecoin on the market, so make sure to keep an eye out for the next big update, as it might be the one to push crypto into a new era!