5 Things to Know Before You Buy Dai
by Lyle Daly | Published on Sept. 1, 2021
This three-year-old crypto has become one of the most popular stablecoins.
Dai (DAI) has likely caught your attention if you've been looking for a stablecoin pegged to the U.S. dollar.
At the moment, it's one of the top 25 largest cryptocurrencies by market cap. It's also fairly easy to purchase, as you can get it on several of the best cryptocurrency exchanges. Before you do that, though, there are several things to know about Dai.
1. Dai is a decentralized stablecoin
Stablecoins are cryptocurrencies that peg their value to another asset. Many of the top stablecoins, including Dai, are tied to the U.S. dollar. Here are a few of Dai's biggest stablecoin competitors:
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
Unlike those and most other stablecoins, Dai is decentralized. A decentralized autonomous organization called MakerDAO maintains Dai.
While other stablecoins have a central organization working to keep the price steady, Dai's price is maintained through smart contracts, which are programs that can execute themselves when certain conditions are met.
2. It's backed by other cryptocurrencies
Another way that Dai is unique compared to other U.S. dollar stablecoins is what's backing it. These stablecoins typically claim that every coin is backed by $1 or a $1 equivalent in a reserve.
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Dai, on the other hand, is backed by other cryptocurrencies. At the time of writing, the largest cryptocurrencies backing Dai are USD Coin, which backs 62% of every Dai, and Ethereum (ETH), which backs 29%. You can see a full breakdown on the "What's backing my DAI?" webpage.
This is one of the potential risks of Dai, as not all its reserves are stable assets. Its position was especially precarious in March of 2020, after Ethereum lost over a third of its value in a single night. MakerDAO even considered an emergency shutdown of Dai. If that had happened, Dai holders would have needed to redeem their coins for Ethereum.
After surviving that issue with Dai intact, MakerDAO decided to add USD Coin to the mix of reserves. That's why such a large portion of Dai is backed by USD Coin now.
3. The price can fluctuate
People sometimes get the idea that stablecoins pegged to the U.S. dollar always maintain their value. It's important to realize that this isn't quite how it works.
Stablecoins like Dai attempt to maintain a value of $1, but there can be fluctuations here and there. Dai's price has both exceeded $1.10 and gone under $0.90 for brief periods of time.
The smart contracts that manage Dai usually correct these fluctuations quickly. So, if you can purchase Dai when the price is below $1, you're getting a good deal. If the price is above $1, it's better to wait until it has been corrected to make your purchase.
4. You can lend Dai or use it as a hedge against market volatility
There are several uses for Dai. One of the most common is as a hedge if you think the crypto market is about to go through a downturn. You could trade some of your more volatile cryptocurrencies, such as Bitcoin or Ethereum, for Dai, and then trade back once prices go up again.
That's a risky game, though. If you guess wrong on which way the market is going, then you'll miss out on the gains you would have made just sticking with your original cryptocurrencies.
Another way to use Dai is staking it. Staking crypto is when you lend it out to earn interest. You can stake Dai with MakerDAO through its Oasis application. There are also multiple crypto exchanges that offer Dai staking.
5. Dai works well for money transfers
Because the price is usually $1, Dai is a good crypto to use for money transfers. If you transfer $100 worth of Bitcoin to someone else, it could be worth $95, $105, or another amount by the time they receive it. If you transfer $100 worth of Dai, it's most likely still going to be worth $100.
The same is true if you want to transfer funds between crypto exchanges. Dai makes sense for that because of its stable value and the fact that so many exchanges support it.
Dai is a great example of what can be accomplished with smart contracts. There have been some issues, but overall, a stablecoin that operates without any central party controlling it is impressive.
About the Author
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Lyle Daly owns USD Coin.