Most cryptocurrency investors are quite familiar with stablecoins such as USDT and USDC. These digital assets are tied to conventional fiat currencies, and they are known for their remarkable price stability. Their main purpose is to provide a secure way to safeguard wealth. As we all know, prominent digital currencies like Bitcoin (BTC) and Ethereum (ETH) are known for their significant price volatility, which makes them less than ideal for everyday transactions. For example Bitcoin's value frequently experiences substantial fluctuations, with daily changes sometimes reaching as high as 25%. On occasion, its price can even skyrocket by over 300% within just a month. While experienced investors might profit from riding market volatility, such a speculative strategy isn't always suitable for the average user. This is where stablecoins come into play, offering a dependable buffer against unwarranted financial risks. But did you know that among all of the stablecoins available there is one that stands out the most? The name of this coin is DAI and today, we're putting the spotlight on it.
Сreation Of DAI
DAI made its debut in December 2017, all thanks to MakerDAO. Now, MakerDAO is an open-source decentralized autonomous organization. The whole idea behind DAI's creation was to nurture a decentralized, off-the-grid stablecoin within the Ethereum blockchain. Over time, DAI has gained recognition and adoption within the world of Decentralized Finance (DeFi). As the DeFi sector grew rapidly, DAI emerged as one of the leading stablecoins, cherished for its decentralized nature, transparency, and the intricate algorithmic mechanisms that keep it stable. These qualities appeal to users who value financial independence and control.
Why Is DAI Crypto Coin Different?
DAI coin emerged as an alternative to established stablecoins, addressing the central issue of trust. Some of you might think “Issue of trust? What in the world are you talking about?” So, let's delve into other stablecoins, including the widely recognized USDT, which is familiar to every crypto user.
We are going to begin with a crucial point: as mentioned earlier, traditional stablecoins are designed to minimize unnecessary financial risks and maintain stability by having real-world financial assets to back them up. These assets are owned and managed by specific entities responsible for minting and overseeing these coins. Consequently, these cryptocurrencies are centralized. This approach inherently conflicts with the principles cherished by DeFi enthusiasts, who champion full decentralization. Centralized cryptocurrencies create the potential for external control, allowing actions like imposing sanctions or user restrictions based on factors such as location, nationality, local regulations, and other relevant considerations. But, as we already said, DAI tokens are different. A notable advantage of DAI is that instead of having a single centralized entity that would oversee and control it, it's governed by MakerDAO, a decentralized autonomous organization. DAI is not backed up by fiat coins, but by other cryptos, such as Ethereum. All processes related to token issuance and removal are closely monitored and meticulously recorded using self-sustaining Ethereum-based smart contracts. Such an arrangement significantly boosts the system's transparency and reduces the risk of corruption.
How DAI Coins Work And How To Mine Them
DAI essentially operates as a loan underpinned by Ethereum, and it's a process open to all who hold ETH and wield the technical know-how to navigate the MakerDAO decentralized application (dApp).
For many users, delving into the intricacies of crafting DAI or grasping its creation process may not be on their radar. In contrast, savvy users, those well-versed in the MakerDAO dApp, can leverage their ETH holdings to secure DAI loans. In this innovative model, DAI stablecoins are brought into existence directly by the users themselves. This is achieved by locking a defined amount of cryptocurrency into a specialized smart contract known as a Vault. In return, users receive a set amount of DAI, determined by a specific ratio intricately tied to the cryptocurrency assets they've placed as collateral. In essence, DAI tokens are continuously "borrowed" from this smart contract.
In the early days of MakerDAO, only ETH could be used as collateral, and the collateralization rate was set at 150%. This meant that $150 worth of Ethereum could serve as collateral to generate $100 worth of DAI. However, more recently, the project's community made a pivotal decision to transition to a multi-collateral system, thereby enabling users to employ various other cryptocurrencies as collateral. Today, MakerDAO accommodates a spectrum of assets, including ETH, USDC, WBTC, MANA, LINK, USDP, YFI, GUSD, and more, each with its unique Collateral Norm (liquidation threshold) for obtaining DAI.
It's important to understand that DAI tokens cannot be mined; they are exclusively available through the lending process. This intriguing ecosystem provides a stable and versatile approach to crypto-backed lending, enhancing the broader landscape of decentralized finance.
Why Loan DAI Crypto Coins If You Pay More Than You Get
Now you are probably wondering why do people loan DAI, if it means they have to put up more collateral? Well, the rationale behind it is quite practical and makes a lot of sense. A significant factor is the demand for liquidity and readily available funds without the need to offload their existing cryptocurrencies. DAI presents the opportunity for individuals to engage in speculative ventures with new digital assets while keeping their current holdings intact. Let's say you're sitting on a substantial amount of ETH, and you have a strong belief that its value in dollars is going to surge in the future. In this scenario, parting with your ETH might not feel like the best move. Instead, it could be wiser to use it as collateral to acquire stable DAI (basically dollars) and then utilize these DAI to purchase another asset that's poised for value growth.
What's more, DAI has got an interesting twist – it's backed by a mix of interest-bearing funds. This means when you borrow DAI and put it in these funds, it can actually earn you some annual interest. And here's the clever part: the interest you pay on the loan often ends up being less than what you can make by using DAI in other interest-bearing services. If the interest you earn outweighs the cost of the DAI loan, you've got a little passive income generator on your hands. It's not just practical; it's a strategic financial move that gives you flexibility and a shot at some decent gains.
What Happens If The Collateral Token’s Value Plummets?
Given that DAI is backed by Ethereum as collateral, you might be wondering about the consequences if the value of the crypto that you chose to use as collateral experiences a significant devaluation. Should the collateral coin supporting your DAI face a significant drop in value, there's a real risk that your DAI may no longer have enough backing. In such a situation, MakerDAO's liquidation mechanism could kick in, resulting in the sale of some of your collateral to settle your outstanding DAI debt. The primary goal is to uphold the stability and value of DAI. To steer clear of this scenario, you might need to either repay a part of your DAI debt or bolster your collateral to ensure it maintains sufficient support from the chosen collateral coin. It's crucial to keep a watchful eye on both your DAI holdings and the status of your selected collateral coin, especially during times of collateral price volatility, to minimize the chances of liquidation.
DAI Price Retention Mechanisms
DAI masterfully maintains its value near the $1 mark through a complex interplay of mechanisms. These mechanisms operate in a fascinating way – stepping in when DAI price climbs above $1, they diligently lower it, and conversely, when it slips below $1, they activate to bolster its value. This delicate balancing act is made possible by the thoughtful participation of individuals who seize the opportunity to profit when DAI's price diverges from the $1 benchmark. As a result, DAI consistently maintains a value that dances just above or below $1, creating an image of an endless wave function oscillating extraordinarily close to the $1 threshold, yet remaining elusive of it. The further it strays from this equilibrium, the more compelling the incentive becomes for DAI to find its way back, illustrating the tenacity and self-correcting character of this stablecoin within the ever-shifting landscape of the crypto market.
Who Should Consider Using DAI?
So to whom having DAI might be useful? Well, DAI is a smart choice for those intrigued by cryptocurrency investments but looking to safeguard themselves from the typical rollercoaster ride of crypto markets. It offers a way to enjoy the advantages of cryptocurrency with much less exposure to value fluctuations. In the cryptocurrency community, it's a common move for folks who hold assets like Bitcoin or Ethereum to appreciate the benefits of shifting some of their holdings into DAI when the market gets shaky.
The low volatility of DAI is also the reason why this crypto coin is praised so highly by crypto gamblers. It makes no sense to place long-term bets using volatile cryptocurrencies, as it adds more unnecessary risks to gambling. Using an asset that maintains a stable price allows you to limit your risk to the typical probability of losing.