A Detailed Guide: What is Dai and How Does It Work?

• Blockchain Council
• May 13, 2022

The crypto domain is constantly going through technological advancements. By the time investors understand about a crypto concept, another concept emerges in the market. Because of the high investment opportunities and easy ways to earn millions, more and more people are getting into the crypto world.

Since the 2017 bitcoin surge, an increasing number of individuals have discovered – and joined – the crypto markets. A vast majority of these investors anticipate that some cryptocurrencies will be utilized for everyday transactions in the near future, enhancing our global ecosystem.

It is, without a question, one of the in-demand methods to accumulate riches. But it is also important to understand the risk attached to it and take necessary precautions to avoid being fooled or scammed while trading on the crypto platform.

Dai aims to overcome the greatest problem with existing cryptocurrencies when it comes to using them as a payment method: volatility.

Are you interested in learning more about Dai (DAI) but don’t know where to begin? There’s nothing to be concerned about. This article will cover all you need to know about the project and get you ready to trade in the most user-friendly manner possible.

Who created DAI?

A decentralized organization MakerDAO, which is autonomous in nature, created Dai stable coins. It functions in a decentralized manner by making use of smart contracts.

Rune Christensen established it in 2014. The smart contracts and Dai token were launched on the Ethereum blockchain back in 2017.

How does MakerDAO work?

MakerDAO reserves the right to increase or lower the demand of the saving rates to ensure the stability of the currency’s value. The governance token of the platform is MKR tokens. These tokens are used when voting is done for the system’s parameters.

The one advantage of these tokens is that they are free from the purview of Dai. On this platform, any user is free to propose a change, but only those who hold the MKR tokens are eligible to cast their vote. The weightage of any vote on the ecosystem depends upon how many MKR tokens the users are willing to put at stake. Interesting, isn’t it?

What is Stablecoin?

A stablecoin is another type of cryptocurrency that reduces the volatile nature of the cryptocurrency that acts as a disadvantage for some people. Stablecoins maintain their value equivalent to the U.S dollar or assets such as gold.

Bitcoin and Ethereum are the two most popular cryptocurrencies in the blockchain world. However, they are highly volatile in nature, which acts as a disadvantageous feature of this currency for some people. This also hinders the wide usage or common adoption amongst people as a mode of payment.

No one would be able to believe that it is a valuable asset if they knew it would keep fluctuating. However, some individuals believe that for long-term contracts, stability is necessary. And investors definitely want their money to be stored and used as an asset that serves as something of value. Investors want something that derives their value in the longer run. Still, the price stability issue with these cryptocurrencies keeps holding them back from adopting it as a mainstream mode of payment.

The problems of creating stable-priced cryptocurrency have always been there, and proposals for creating a currency with price stability have been doing rounds for quite some time now. This is the reason why stablecoins were brought into existence. This has been an achievement in the price stability issue of cryptocurrency.

Stablecoins aim to reduce the fluctuations in the price by being associated with a centralized external asset, and their price stability is ensured and maintained by the central authorities.

There are various types of stablecoins that are functioning currently. While some of the currencies can fluctuate, the central authorities keep the price stable.

DAI as a Currency:

Dai is the first stable cryptocurrency that is decentralized and collateralized. It is a native token of the Maker protocol. It aims at reducing the volatility of trading on the blockchain. It is an ERC-20 token that ensures maintaining a value equal to one U.S dollar. Smart contracts play an important role in this. It’s because an automated system of smart contracts carries out the complete process on the Ethereum blockchain.

Dai had come into existence as a solution against the volatility factor, also helping to restore the faith of the user in the cryptocurrency.

How does this solve the price stability issue?

Dai is associated with the dollar, and it necessarily maintains a value of $1 at all times. Therefore, it keeps the faith of the traders restored in crypto trading. On the other hand, the central authorities administer the U.S. Dollar to keep the price from fluctuating, thereby ensuring the price’s stability to its users.

Salient features of DAI:

• DAI is a decentralized currency by nature, which is a collateral-backed stable cryptocurrency.
• It ensures better security and transparency between transactions.
• The currency is rapidly gaining the trust of the users.
• It does not have a credit risk as compared to the centralized currency.
• It is an open-source currency.
• MKR tokens and DAI are separate tokens to deal in.
• It aims to solve the very problem that exists with the existence of cryptocurrencies, i.e., volatility.
• It is guarded by a central authority to ensure that the prices remain stable.

How to trade in DAI?

You cannot trade DAI like other cryptocurrencies. When users take a collateral loan on the platform, DAI is created. And it burns out when the loans taken are paid back. The constant creation and destruction of the currency ensures that there is never more than what is needed on the platform so as to maintain the proper demand and the value of the currency on the platform.

The loans on the platform are made via Ethereum’s digital token, ETH, and thus also referred to as “Single Collateral DAI.”

Smart contracts lock the ETH when the users join the ecosystem in order to retain it. The value of the ETH locked up in the smart contract generates a value equivalent to the DAI. However, the initial amount remains locked up in the contract until the user pays back the full DAI amount lent plus interest on it. Once the loan payment has been made in full, the users are free to cash their ETH investments out or make other transactions on the Ethereum platform.

Later on, in 2019, Multi-Collateral DAI was also introduced, and the currency for it was named BAT. As a result of the extreme volatility suffered in March 2020, we now have four cryptocurrencies: ETH, USDC, BAT, and WBTC, which can be used as collateral against loans for generating DAI.

DAI Supporting Wallets

A wide variety of wallets supports DAI. There are different forms of wallets, and the good news is that most of the wallets support DAI. To name a few:

• MOBILE WALLETS like Coinbase wallet, Celcius DexWallet
• PAPER WALLETS like MyEther Wallet, MyCrypto
• HARDWARE WALLETS like Trezor and Ledger.

How to buy DAI?

To purchase DAI, follow the given steps:

STEP 1: Create an account

You can choose to buy DAI by opening an account with the help of a crypto broker who supports the token. However, you might be subjected to some disadvantages when choosing a broker option, like paying the broker’s commission and restrictions on buying the other cryptocurrencies available on the platform.

STEP 2: Buy a wallet

The next step is to identify and choose a wallet that aligns with your personal interests and goals for the investment. This is a necessary step, as you would be required to store your tokens in a wallet itself. This also ensures that you’re provided with the personal keys that might be used to store currency that is not put at stake.

There are two types of wallets: Hardware wallets and Software wallets.

Pro tip: For better security, you can choose a combination of both wallets.

STEP 3: Execute purchase

After you set up your account with a broker and select your wallet, it is time to make your purchase. For this, you would be required to fund your broker account, choose your order type and finally, submit the order.

Why use DAI?

That sounds like the right question for now. Doesn’t it? Why would anyone want to take out a loan using DAI when they can walk up to the bank and get one?

This is where the DAI crypto comes into the picture. Taking up a loan from DAI replaces the third-party interferences via the use of smart contracts. Not only that, the interest rates are lower for the one who wishes to take a loan. On the lender’s side, there is no third party to cut off from the interest amount.

Hence, it is clear that using DAI for taking up loans is beneficial for every party involved. The rate of interest can be decided mutually, at which the repayment of the loan is to be made.

Points to be noted about DAI:

Since it is just a token on the Ethereum, anyone can trade, use or build without any permission. It is a decentralized ecosystem.

• DAI can also be put into different smart contracts and modified for various uses.
• DAI is a stable and suitable shield against the problem of volatility.
• DAI tokens are created when the loans are requested, and it gets destroyed as soon as the loan is repaid in full.

Advantages and Disadvantages of DAI:

DAI cryptocurrency comes with its own set of advantages and disadvantages. One of the concerning issues is that it might not work 4-5 years down the line. It damages soon after the loan is repaid to the lender in full. DAI is restricted largely to loans.

However, as far as you can see, DAI has made its place and is quite popular now, especially in the crypto sphere. This is because it maintains the stability and thus the value of the currency.

You would probably be getting one of the major advantages of using DAI, which is the transactional benefits.

Minimum or zero volatility due to its soft association with U.S. Dollars to keep the value of the currency equal to $1. Currently, DAI’s price is at 80.6494, and the one-day return we expect it to provide is 0.03%. Similarly, the seven days return of the same is expected to be 1.22%.

DAI tokens burn out after every full repayment of the loan that was granted against the borrower, and the lenders get this relief that there are no third parties involved that otherwise would have been involved, and charges must have been incurred from the lender.

The borrower and the lender on the platform can decide on their mutual rate of interest, which shall be paid upon the repayment of the original amount.

Conclusion

You can trade in DAI since it is still one of the most popular and fastest ever growing cryptocurrencies. As mentioned above already, over the years, it has grown drastically, and the changes on the platform are done all by casting the votes of its users who hold MKR tokens.

So, in terms of safety and security, DAI undoubtedly is one of the most secure cryptocurrencies for investors. Along with that, it also provides the solution to the problem of the stability of the currency. It ensures that the value of the currency is maintained by associating it with the U.S Dollar.

It is certainly up to you to decide whether or not you would want to mine or buy DAI tokens or transact in DAI tokens However, it is always a good idea to do your own research before making a decision. You can always consult a cryptocurrency expert in case of a dilemma. You can buy DAI on various platforms like CoinBase, Gemini.com, or Kraken easily.

To learn all about the cryptocurrency domain, you can probably start by enrolling in a cryptocurrency course. Blockchain Council offers some of the best cryptocurrency courses with certification. These courses are economical too. You can look out for the one that fulfills your criteria.