Beginner’s Guide to Using DAI Stablecoin (2021)

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DAI is an Ethereum blockchain ERC20 token with a fixed value of one US dollar. It is also necessary for the MakerDAO loan system to function.

There are numerous reliable digital currencies available, but only one can claim to be widely utilised, decentralised, and trustworthy. In this post, we’ll look into what distinguishes DAI from the rest of the stablecoin group.

Cryptocurrency with a stable value is not new or unusual. Tether has been around for years and is by far the most popular stablecoin. Stablecoins like USDC, PAX, Gemini Coin, and Facebook’s impending Diem (previously Libra) are also trying to be the stable crypto of choice. but they all rely on trusting someone to honestly keep dollars in the bank. DAI changes that.

What is DAI?

DAI is an Ethereum blockchain ERC20 token with a fixed value of one US dollar. It is also necessary for the MakerDAO loan system to function. DAI is formed when a loan is taken out on MakerDAO. It is the currency that users borrow and repay.

When DAI is generated, it simply serves as a stable Ethereum token. It may be used to make purchases and is easily transferrable between Ethereum wallets.

 

Who Invented DAI?

DAI is a product of MakerDAO, which was founded by the current CEO, Rune Christensen.

The present version of DAI is technically an improved version of the stablecoin known as multi-collateral DAI because it allows for the creation of DAI from a variety of crypto assets. The previous form of DAI was known as single-collateral DAI because it could only be created with ETH as collateral. Basic Attention Token is the first crypto asset approved in the new multi-collateral DAI scheme, in addition to ETH (BAT).

What’s so special about it?

The price of DAI is kept in check through a system of smart contracts automatically executing themselves. If the price of DAI fluctuates too far from one dollar, Maker (MKR) tokens are burned or created in order to stabilize the price of DAI.

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MakerDAO’s algorithms automatically manage the price of DAI so no one person needs to be trusted to keep the currency steady. If the system works as intended and one DAI equals one US dollar, MKR holders benefit because the total supply of MKR decreases–making MKR more rare and valuable.

To date, DAI has remained stable for over three years with only minor fluctuations from its one dollar price peg.

 

MakerDAO upgraded its system to include the DAI Savings Rate in which DAI holders can lock their DAI holdings into MakerDAO’s Oasis app to earn interest.

 

What else is different?

Because DAI is merely an Ethereum token, anyone can use or construct with it without permission. DAI, as an ERC20 token, serves as a building piece that can be included into any decentralised application (dapp) that requires a solid asset or payment mechanism.

Developers can also wrap DAI in several smart contracts and adapt it for various purposes. For example, xDAI takes DAI and places it on a speedy and low-cost sidechain to make transfers and payments more convenient and efficient. Chai and rDAI take standard DAI and place it in an interest-generating pool, allowing users to select what happens to the interest as it accumulates.

 

How is DAI produced?

DAI is created whenever someone takes out a loan on MakerDAO. DAI is destroyed when loans are paid back.

How do you get hold of DAI tokens?

The most direct way to get DAI is by taking out a loan on MakerDAO’s Oasis platform. You can also trade DAI on that same platform or use a centralized exchange such as Coinbase.

What can you do with DAI?

DAI is commonly used as a steady hedge or counterweight to the volatility of more popular crypto-assets such as Ethereum or Bitcoin. DAI’s consistent value indicates that it is suitable for investors or traders who believe the market is poised to fall.

Because DAI is stable, it is also one of the best crypto assets to invest in. The Coinbase Card enables users to spend DAI and other crypto assets by converting the crypto into cash and using a Visa card to do it. If you are in the UK or Europe, you may also use the Monolith Visa debit card to spend DAI.

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DeFi and DAI

The 2020 boom in decentralized finance (DeFi) has seen DAI emerge as one of the most popular assets in the DeFi ecosystem. A number of services have emerged offering to lend on DAI deposits.

  • Coinbase customers from the US, UK, Netherlands, Spain, France, and Australia can earn two percent a year on their DAI deposits.
  • A dapp dubbed dPiggy not only allows users to earn interest, but also have their returns automatically used to purchase a variety of crypto assets at the end of each month.
  • Bitcoin can now also be used to generate DAI.

Stablecoins in the crosshairs

A market fall in March 2020 jeopardised DAI’s stability, so developers implemented a contentious feature to allow it to keep its peg, which was aided by another stablecoin, USDC.

Then, in July 2020, an upgrade to one of the primary DeFi lending protocols caused DAI to deviate once more, and the community voted to raise the system’s debt ceiling. The next month, it agreed to prioritise GUSD, BUSD, and eight other tokens as collateral, allowing them to be used to manufacture DAI and increase liquidity.

Recently, authorities have focused on stablecoins; in the United States, the proposed STABLE Act would hold stablecoin issuers to some of the same criteria as banks.

Legislation of this kind could have serious consequences for a decentralized stablecoin such as DAI. Peter Van Valkenburgh, research director at crypto advocacy non-profit CoinCenter, argues that were the STABLE Act (or something like it) to pass, DAI validator nodes could find themselves in violation of the law unless they’re a chartered bank.

Nonetheless, geopolitical turmoil is making stablecoins more popular than ever; when Argentina imposed a new 35% tax on all purchases made in US dollars, DAI trade activity soared on local exchanges as a result of the news.

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The Future

MakerDAO is working hard to brand DAI as the “world’s first unbiased currency” and it’s starting with the logo, which it wants to be as ubiquitous and recognizable as symbols for the dollar ($), euro (€), and pound (£).DAI will need to be embraced and utilised by millions of people in order to become the first trustless mainstream currency–a mission that will include not only branding, but also marketing and education. Though it will not be an easy undertaking, no other stablecoin is better positioned to accomplish it.

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