The stablecoin DAI and its particularities

DAI is a decentralized stablecoin that operates in the Ethereum blockchain and always aims to maintain the value of 1 USD.

 

DAI is a stablecoin whose target is to present the same value as 1 USD, and it achieves this with the help of an open source platform accessible to all and using any cryptocurrency balance as a back-up.

Some people believes that its name comes from the famous Chinese cryptographer Wei Dai who in 1998 already spoke about the possibility of using cryptocurrencies. It is said that he also got involved in the Bitcoin project and that he met Satoshi Nakamoto.

But, what exactly is DAI?

DAI as a stable cryptocurrency always tries to maintain the same value as one US dollar since its objective is to have a stable value using as a contrast of other cryptocurrencies whose rises and falls steadily against the dollar. DAI Holders are not subject to fluctuations against the dollar.

We remember the person who bought two pizzas for 10,000 bitcoins in 2010 and at that time they cost 30 dollars but now the price would be worth 90 million dollars. If that person had first bought the DAIs with dollars and kept the bitcoins now he would be a billionaire. DAI is not only a stable cryptocurrency, it is also a decentralized crypto that works with the Etherium blockchain. Being a cryptocurrency with Dollar parity makes it more functional than dollar, since it can be transmitted instantly worldwide in an more efficient way. DAI is shown as a useful asset to store exchange values of total stability.

Reasons why to use IAD:

There are many reasons to use DAI instead of dollars. Apart from the obvious reason of being a cryptocurrency and a stablecoin (i.e. that it is international and can be kept in any cryptocurrency portfolio without the need for a bank account) there are very interesting differential features such as the fact that it is programmable and guaranteed money.

DAI is a stable cryptocurrency like other stablecoins that maintains parity with the US dollar, but why to use it and not using dollars directly or other stablecoins?

These are the reasons for using DAI:

1st - It's cross-border: wherever you live you can have DAI and no need to have a bank account, so we can have digital dollars without that need. It is also a way to protect funds if you live in economies where inflation is very high. (this is a common feature with other stablecoins).

2nd - DAI is programmable money: for example if you have a business and you want to pay a list of people, you could draw up a smart contract that would automatically send DAIs to each person for a limited time, and at an exact time for a very low cost. This is not possible with a conventional banking structure. (This is a particular feature).

3rd - DAI is easy to transfer at a low cost. You can transfer amounts in DAI in a matter of seconds and for a few cents, unlike conventional dollars that take days at a very high cost. DAI circulates under the Etherium blockchain and therefore is fast and inexpensive.

4th - DAI is decentralized, as a cryptocurrency and it can be stored in any app like any other crypto without the need of a bank account, so the bank are under Bank or any company custody. You will  be always able to access it and the account where the DAIs are located will never be blocked or cancelled.

5th - DAI is transparent and open source. Anyone can download, view and use the code that supports DAI. The system that generates it is public and verifiable.

6th - DAI is asset-backed: behind the DAI there are other cryptocurrencies that are worth more than the dollar that backs it (collateral value) within a smart contract. This is a guarantee that gives DAI its fundamental value. This is a differential features regarding other stablecoins that are backed by American dollars (such as Tether - USDT or Dolar Coin - USDC). DAI has a collateral backing of other cryptocurrencies that can be seen publicly in the Etherium blockchain. That’s why this crypto is a good store of value like a security or commodity.

How do you keep DAI as a stablecoin?

As it is said before, DAi is a fixed currency that tries to maintain the value of one US dollar. And how does it do that?

"It is possible to keep the price of DAI stable against US dollar thanks to one of the world's largest decentralized applications: an open source platform called MakerDAO (MKR) or Multiple Collateral DAI System."

For example, if a user wants DAI, he must first buy mainly using ETH and could do so by sending this cryptocurrency to the platform in exchange for DAI. When buying DAI, the funds provided are deposited in a kind of guarantee bond, which corresponds to the acronym CDP (Collateralized Debt Positions). The exact amount of DAI generated is proportional to the amount deposited in ETH. A common ratio would be 3 to 1, that is, it means that if you deposit $300 at ETH, you will get $100 in DAI whenever you want. To get your ETH back you have to return the DAI and pay what is called a stability fee. This simple system creates economic incentives trying to keep the value of DAI at a constant dollar parity.

But, how do the incentives work? By buying cheap DAI and then using it to get your ETH back for less DAI. If the DAI rises above the dollar, the user can do the opposite. He can produce DAI against ETH and gain additional purchasing value. When there are tens of thousands of users generating and paying for DAI, these economic incentives, along with publicly voted adjustments to the stability fee, attempt to maintain the price of DAI at one dollar. The system is pure mathematics and economics working under an open source system. Today the process of creating DAI is one of the largest decentralized applications in the world. With over $300 million in ETH being held in CDPs, for this good reason.

Regaradong the native cryptocurrency of DAI System, we can see in the graph below a dynamic overview of its price since it entered the CoinMarketCap Index.

As it can be seen, it has almost always been within the range of 0.99 - 1.02 dollars, except on rare occasions when there have been greater ups and downs. It currently has the following values:

Since DAI was launched as a platform in 2017, it has maintained a value close to the dollar which is a great achievement in this decentralized industry and constantly evolving financial markets, but it was at the end of January of this year that this stablecoin was listed in the CoinMarketCap.

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