In this article, we will cover what DAI is and how it is benefiting the crypto community.
The DAI coin is a stablecoin pegged to the dollar. This means it is a lot less volatile than other cryptocurrencies as it will not change price unless the dollar does. DAI differs from other stablecoins in that it is decentralised. Unlike other centralised coins, DAI is backed by collateralised cryptocurrency debit in the form of Ether. This makes it impossible for the coin to be shut down as there is no central authority required.
DAI was released in 2017 by Maker, a smart contract platform. Unlike other stablecoins that are backed by physical currencies, the DAI coin is not vulnerable because Maker itself uses decentralised governance, so there is no way for a government entity to steal a user’s funds or for a human error to occur that will compromise all funds.
How is DAI made?
The DAI stablecoin is a loan taken against Ethereum, meaning anyone who has some ETH has the ability to create DAI. This process used to be complicated and take a long time to execute. However, now with the creation of Maker’s dApp, the process is simple and fast. By connecting a wallet to the dApp, a user can easily create a collateralised debt position (CDP). Once this CDP has been made, it can generate some DAI that a user can spend and trade.
However, a user does not have to create DAI to be able to have it. Just as with any cryptocurrency, DAI can be bought on an exchange, and as long as it still holds its $1 value, a user can spend and convert the amount as much as they like.
Even though you can just go onto an exchange to purchase DAI and avoid the process of actually creating it, there are advantages to creating the coin yourself. If a user wants to get a loan and needs to have ETH as collateral, the DAI coin can be used for this. Another reason is that DAI is actually worth more than $1 when sold on. This means that when a user creates DAI it will cost them $1, but if they go on to sell it on an exchange, they will get more than $1 for its value. This type of program trading is how Maker is able to keep the price of DAI pegged to $1.
Uses of DAI
DAI promises to play an important role in the crypto economy by eliminating the negative consequences of volatile cryptocurrency prices. Because they eliminate this volatility, they are able to avoid all price disasters, such as Bitcoin plummeting from $20,000 to $3,300 over the course of 2018.
Being a stablecoin, DAI also has the ability to keep users in the cryptocurrency financial system. Stablecoin transfers take minutes to complete, unlike standard money transfers which can often take days or weeks to complete. Due to the many regulatory issues surrounding fiat, the majority of cryptocurrency companies are more willing to work with stablecoins rather than cash.
According to its founders, the DAI token can be used in multiple markets, such as prediction markets and gambling. This will increase its adoption and make it more valuable. Investment in the DAI stablecoin also translates into an investment in the underlying assets used to stabilise its price. In turn, this could translate into profits.
Stablecoins such as DAI are becoming a popular choice for investors as they reduce the volatility that often causes other currencies to plunge into bear markets, resulting in huge losses for investors. However, it is yet to be seen whether stablecoins will take a larger market share than original cryptocurrencies such as Bitcoin.
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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.