What Is Dai (DAI), and Should You Buy It?
by Tor Constantino | Published on Aug. 7, 2021
DAI is a useful stablecoin that's pegged to the U.S. dollar, reducing volatility and enabling several DeFi features such as lending, borrowing, or trading.
Dai (DAI) is a stablecoin linked to the value of the U.S. dollar. To maintain its price stability, DAI’s value is regulated by MakerDAO, its decentralized governance community. While actual DAI stablecoins are produced via its Maker Protocol platform that accepts various cryptocurrencies as collateral, DAI can also be bought directly using fiat money (like the U.S. dollar) on most regulated crypto exchanges, such as:
Let's take a look at the basics of DAI so you can decide if it's the right cryptocurrency for you.
There are three fundamental concepts that are necessary to understand DAI and what it does.
What's a stablecoin?
Stablecoins are a distinct subset of cryptocurrencies that strive to minimize the volatility usually associated with cryptos. Stablecoins also provide the expected crypto benefits of:
- Secure transactions
- Instant transfers anywhere in the world
- Lower fees
- Speedy settlements
Stablecoins such as DAI can do this because they are backed by a reserve currency or other underlying asset.
What's the Maker Protocol?
Maker Protocol is the foundational system developed by DAI creator Rune Christensen. It allows anyone in the world to produce the DAI stablecoin using a variety of cryptocurrencies as collateral. Some of the coins and tokens accepted as collateral include:
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- Ethereum (ETH)
- Compound (COMP)
- USD Coin (USDC)
- Basic Attention Token (BAT)
What's a decentralized exchange?
A decentralized exchange (DEX) is a cryptocurrency exchange, such as UniSwap or ByBit, where users can easily exchange coins or tokens. For clarity, coins run on their own blockchain, while tokens run on another blockchain. With DEX transactions, there's no third party brokering the deal, so it's known as a "permissionless" transaction. A DEX runs on a piece of computer programming code -- known as a smart contract -- which runs on a blockchain. The nature of the blockchain and code together execute the transaction without a credit check, bank approval, or any delay.
What it does: DAI is a decentralized stablecoin with a 1:1 value ratio linked to $1 U.S.
Date launched: December 2017
Market cap: $5.69 billion (CoinMarketCap, August 2021)
Availability: Available on several major centralized exchanges, such as Coinbase and Kraken, as well as DEXs including Uniswap, ByBit, and DAI's proprietary Maker Protocol
Should I buy it?
One of the key benefits of DAI is that it provides the transactional benefits of a cryptocurrency with hardly any volatility due to its linkage to the U.S. dollar. DAI is an ERC-20 token that was built specifically to run on the Ethereum blockchain. ERC stands for "Ethereum Request for Comment," which is the standard developed in 2015 that creates and enables smart contracts on the Ethereum network.
DAI can be purchased outright on either centralized cryptocurrency exchanges or DEXs. Using the Maker Protocol, you can also borrow DAI by depositing Ethereum-based assets as collateral to underwrite the amount of DAI borrowed. DAI requires a larger collateral deposit than the amount of DAI borrowed to ensure network liquidity. If the value of your crypto-collateral drops below the value of the issued DAI tokens, the collateral can be forfeited. However, if your collateral increases in value, your DAI borrowing limit increases proportionately. The Maker Protocol operates similar to an escrow account that holds collateral until the borrowed DAI and processing fees are returned.
Another benefit unique to DAI is how widely integrated it is within the Ethereum blockchain. Once bought or borrowed, it can be used in hundreds of decentralized apps including:
Here are a few other features worth considering.
1. Passive income
DAI also has a unique interest-generating program called the DAI Savings Rate (DSR). It allows users to put idle DAI tokens to work producing a variable interest income through a lockup period. Another passive income option is where the DAI owner deposits the tokens directly into a MakerDAO smart contract. The smart contract is programmed to automatically add interest to the account. The investment and accrued earnings can be withdrawn anytime and has no minimum deposit.
2. Decentralized freedom
DAI investors benefit from unrestricted access to their funds, thanks to DAI's decentralized design. There are no intermediaries, approvals, or credit checks due to its permissionless and transparent system. That's not always the case for other assets or fiat currencies.
3. Very secure
Routine audits, DAI's secure integrated wallet, two-factor authentication, and other security measures boost the safety of the DAI ecosystem. Additionally, developers in the MakerDAO community verify all smart contracts on the blockchain to ensure liquidity and network viability.
DAI provides a tremendous amount of flexibility and utility, with the price stability of the U.S. dollar to boot. If you buy DAI, it can be used across the Ethereum network in a number of ways, including:
- Staking of idle tokens to produce interest income
- Borrowing DAI to buy other coins
- Using it as a stable investment to hold profits from other token sales
- For in-game purchases
One downside is potential loss of your overcollateralized asset if you borrow DAI on the Maker Protocol. Otherwise, the upside of this unique asset makes it an easy way to dip your toe into crypto through a viable investment worthy of serious consideration.
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.
Tor Constantino has holdings of Bitcoin, Ethereum, Cardano, and XRP.