The crypto domain is a fast-changing and dynamic field. New technologies and concepts emerge in the market before investors can fully grasp them. DAI is a cryptocurrency that tries to solve the biggest challenge that other digital currencies face when people want to pay for goods and services with them: their prices change too much.
One of the most popular ways to build wealth is through cryptocurrency trading. However, this also comes with significant risks that need to be understood and mitigated.
What is DAI?
DAI is a decentralized cryptocurrency that is stabilized against the value of the US dollar. It is created using the Maker Dao (MKR) stablecoin system, which uses margin trading to respond to changing market conditions and preserve its value against the world’s major currencies. 1 DAI must be equal to 1 USD.
It is therefore a “stablecoin”. Stablecoins can be considered “crypto versions” of traditional currencies like USD, EUR, or NOK. Numerous incentives exist for opting to utilize these digital currencies, chiefly tied to their capacity to maintain a steady value, shielding you from the customary price volatility commonly observed in other cryptocurrencies.
DAI is a token that follows the ERC-20 standard, which defines a common interface for tokens on the Ethereum network. DAI seeks to maintain a 1:1 peg to the US dollar through the use of smart contracts that lock up other crypto assets as collateral.
Unlike other stablecoins, which are issued and controlled by a central authority, DAI is the native token of the Maker Protocol – a decentralized and autonomous ecosystem of smart contracts that runs on the Ethereum blockchain.
Who is Behind DAI?
Rune Christensen, a Danish entrepreneur and biochemistry graduate, founded MakerDAO as an open-source project in 2014. The following year, he assembled a team of developers to create Maker Protocol, a decentralized platform that allowed users to borrow money using cryptocurrency as collateral.
In 2017, Maker Protocol launched DAI, a stablecoin that runs on the Ethereum blockchain through a smart contract. DAI aims to provide a non-volatile and decentralized currency that can also be used for lending purposes with crypto-backed loans.
MakerDAO is a project that aims to create a stable and decentralized currency called Dai, which can be used by anyone, anywhere, anytime. The founder of MakerDAO, Christensen, has relinquished his ownership of the project and entrusted it to the Maker community, which consists of people who hold MakerDAO’s native token, Maker (MKR).
By owning MKR tokens, the community members can participate in the governance of the Maker Protocol, which is a set of smart contracts that power Dai. The community can vote and reach a consensus on how to improve and update the Maker Protocol and Dai.
Key Facts About DAI
- DAI is a decentralized Ethereum-based application that runs on the Ethereum blockchain.
- DAI is a type of stable cryptocurrency, or stablecoin, which means that its value is pegged to another more stable asset, such as the dollar, pound, or gold. The primary objective of stablecoins is to mitigate the erratic nature and potential hazards associated with holding cryptocurrencies.
- DAI is a type of cryptocurrency that runs on the Ethereum blockchain. This means that DAI can be sent and received by anyone, anywhere in the world, without the need for intermediaries such as banks or other central institutions. Unlike other cryptocurrencies that have volatile prices, DAI maintains a stable value of 1:1 with the US dollar.
- DAI is decentralized, which implies that no centralized entity controls the supply of new DAIs in circulation, in contrast to Tether and the majority of other large stable cryptocurrencies.
- DAI is frequently employed as a safeguard against market fluctuations due to the unpredictable nature of the cryptocurrency market.
- DAI is often used in decentralized services that offer loans and funds with interest.
How to Use DAI?
DAI is a secure and stable payment option that also provides crypto traders with a powerful way to reduce their risk. When the cryptocurrency market experiences extreme volatility, which is not uncommon, users can choose to store some or all of their funds in DAI to avoid losses.
Unlike traditional lending options, DAI users do not need to go through any credit checks or approvals to borrow DAI. They simply lock up their digital assets as collateral and receive DAI in return, which they can use for any purpose (including buying more cryptocurrency).
How the Spark upgrade revolutionized the DAI system
MakerDAO created the Spark Protocol to improve DAI’s system with self-adjusting CDPs, faster liquidations, lower fees, and a better user experience. MakerDAO continues innovating to scale DAI and make it more robust during any market conditions.
Key Benefits of Spark:
- Enables flexible collateralized debt positions (CDPs) with automatically adjusting collateral amounts based on real-time liquidation risks. This allows users to maximize collateral efficiency.
- Facilitates fast on-chain liquidations (3-5 minutes) through forced collateral auctions at a minimum viable price. Sharply reduces DAI supply volatility and demand spikes from liquidations.
- Lowers liquidation ratios from 150% to ~70% due to faster liquidations. Users can leverage collateral more to generate higher DAI loan yields.
- Reduces DAI loan stability fees by up to 50% due to efficiency gains. Borrowing costs will decrease.
- Provides a simpler, intuitive experience with self-adjusting CDP collateral amounts. Users have more control.
Spark can handle 100x the load of liquidations that the original Dai (DAI) protocol did, and it does it in a trustless manner while maintaining DAI’s $1 peg, accelerating its rates of liquidations with a clear surplus of supply for DAI.
The impact of Spark relies on how it changes the works behind the scenes of Dai (DAI) stablecoin, as it addresses both the investor’s doubts and the user’s experience with its revolutionizing fast liquidation, flexibility, and low fees.
Choosing a DAI Wallet
If you want to store Dai (DAI) securely and offline, you might want to consider a hardware wallet or a cold wallet. These devices let you backup your DAI and protect it from hackers.
Some of the hardware wallets that support DAI are Ledger and Trezor. However, hardware wallets are not very cheap or easy to use. They are more suitable for experienced users who have large amounts of DAI to store.
Software wallets can be downloaded as smartphone or desktop apps and can be either custodial or non-custodial. Custodial wallets are those that keep your private keys on a server controlled by the service provider. Non-custodial wallets are those that let you control your own private keys on your device. Software wallets are convenient and easy to use, but they are less secure than hardware wallets and may not be suitable for storing large amounts of DAI or for more experienced users.
Tokenomics
DAI’s supply is demand-driven. Users can deposit ETH or other supported ERC20 tokens into the Market platform as collateral and create DAI, which they can borrow at a 66% collateral-to-loan ratio. This increases DAI’s supply and determines its value mainly.
The Maker Protocol, a software that runs on the Ethereum blockchain, regulates the supply of DAI tokens. Unlike other stablecoins that are issued by private companies, DAI can be created by anyone who uses the collateralized debt position (CDP) function of the Maker Protocol. The Maker Protocol ensures that every DAI token is backed by enough collateral to maintain its price stability.
conclusion
DAI is an Ethereum-based stablecoin whose value is pegged to the US dollar. It is created using the MakerDAO Collateral and Lending System. It is one of the first and most popular forms of decentralized finance, as it allows users to hedge against price fluctuations in the crypto asset market. Another way to use DAI is to lend it to different platforms in the decentralized finance space and get passive income from your crypto.
This is possible because DAI is compatible with many services that offer interest rates for deposits. Stablecoins like DAI are an important part of the crypto asset market and facilitate new innovations and important features in the crypto universe.
