What is Dai (DAI)?

What is Dai (DAI)?


The Dai Coin

After being developed by the MakerDAO team, Maker Dai launched on December 18, and operates as a decentralized stablecoin that provides cryptocurrency traders with increased options concerning opening and closing positions, and helps facilitate trading while staying entirely in the world of cryptocurrencies.

A stablecoin is a low volatility cryptocurrency that has its price or value pegged to a particular fiat currency. Tether is the most popular example of a stablecoin and runs as a token on the Omni blockchain and has its price linked or “tethered” to that of the U.S. Dollar. These coins allow traders to maneuver more efficiently without having to touch fiat, they also allow cryptocurrency exchanges to provide their users with “fiat type” currencies without having to undertake the prolonged and stringent verification process that goes with allowing fiat trading.

The MakerDAO team worked to develop a fair and transparent stablecoin that could operate as a trustworthy asset-backed currency and a viable option to other stable currencies such as Tether and Bitshares’ BitUSD. The Dai launched as one of the first decentralized stablecoins that runs on the Ethereum blockchain.

Central to keeping the process fully efficient and completely decentralized is the relationship between the Dai and MKR tokens. Whilst the Dai remains stable, MKR fluctuates in value and offers users benefits for actively using it.

How They Work

The Dai works in a similar way to Tether, however, it operates without centralized control as the mechanism is maintained by the market. In addition, the Dai also works in unison with the MKR token, which is free to fluctuate in value and helps to facilitate the entire process. Users effectively create their own Dai by using Ether to act as collateral that allows the creation and issue of Dai coins.

The Dai works in direct relation to the US Dollar with 1 DAI equal to $1 USD. The currency is autonomously maintained using smart contracts that adapt and respond to market dynamics. This guarantees that the currency remains pegged to the US Dollar and provides traders with stability regardless of the state of the market.

In order to create Dai, Ether must first be wrapped into a compliant token and then shifted into an MKR token before Dai is issued into an account. Funds can then be stored as stable Dai coin and owners can reverse the process to sell Dai back into Ether whenever necessary. While the Dai coins are stable and linked to the US Dollar, the MKR token is free to move in price and increases in value in line with an increase in use.

MKR is also the only way to pay stability fees when using the Dai coin, and if there is increased adoption of Dai, there will also be increased demand for MKR. On top of this, when stability fees are paid with MKR, the MKR spent is permanently destroyed, which reduces the total MKR supply, thus increasing its value.

The entire process limits the amount of volatility crypto traders are exposed to and allows users to generate their own coins via an autonomous system of smart contracts. Each Dai is backed by a valuable asset that is held in the decentralized smart contract platform, and Digix has also recently partnered with Maker in order to help provide a Dai/Maker coins (MKR) backed by Digix Gold tokens (DGX) as collateral.

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