The stable coins were created in order to minimize volatility by anchoring its value at fiat coins. Most of them are backed by deposits in them and that is where DAI make a difference by issue it in a decentralized way Thanks to the collateralization of guarantees offered as a backup.
A little history
Its origins date back to MakerDAO and 2014 aiming at the creation of a DAO to sustain a stable currency within Ethereum.
In 2017 the efforts saw the light with the creation and launch of the first version of DAI, known at the time as SAI. His control started from the smart contracts and not by the fiat currencies of a bank and its variables were decided by a DAO where the holders of Maker tokens (MKR) could participate
What were the objectives?
His main objective was to create a safe medium to store value. Bitcoin and Ethereum suffer from volatility immersed in the growth of the sector. This is not a problem of economic systems that seek to generate profits from this. But within a platform for loans, savings or money transfers, it is not desired.
Thanks to a DAI collateral guarantee system can offer the parity against the dollar using high volatility cryptocurrencies. In this way, they can carry out fixed and stable value operations on other platforms with the security of guaranteed deposits. Regardless of whether cryptocurrencies go up or down, the value will always be the same and there are guarantees to prevent loss of value.
This allows the development of new functionalities to take advantage of the potential of the blockchain, offering a stable and decentralized means of exchange of value.
Forks can even get a constant performance thanks to collateralization, the creation of autonomous feedback mechanisms and external actors duly incentivized to maintain the dynamism of the system.
How does DAI work?
DAI is made up of different elements:
- MakerDAO Maker Protocol: It is a protocol that works on Ethereum smart contracts and orchestrates the operation of DAI and DAO
On it falls the responsibility of provide parity against the dollar. As well as its issuance, burning of tokens, interest rates, stabilization rates, penalties, auction systems, governance, voting system and decision-making.
- Market Vaults (ex CDP): Allows the protocol to generate stablecoin by depositing collateral assets within tokens
When we make a deposit, it tells us the variables of collateralization, interest rates, stability and the liquidation relationship of our position. With this we block the token and receive the DAIs at an ERC-20 address designed for this task.
It also serves for do the process in reverse. Send the DAI and receive back the collateral saved by burning it. Its evolution has allowed admitting new collaterals to provide new stability options to the system.
What is the difference between DAI and SAI?
In November 2019, MarkerDAO updated the maker protocol, changing the way we could generate DAIs. Before the only way to generate it was through a CDP (Collateralized Debt Position). This change opened the doors to be able to use other tokens as collateral and issue DAIs.
The update was called DAI-MCD o DAI Multicolateral to accept new tokens, in addition to Ether, so that these would serve as collateral to create DAIs. Adding more liquids and a new stability scheme in the protocol.
This update received a lot of criticism but DAI continued with its roadmap. Now you could choose SAI only for Ethereum and DAI-MCD that accepts multiple collaterals.
To abandon the original scheme it was necessary to pass the funds from the former to the new system. This is still in the process, since there are smart contracts with UPS. Although it has lost acceptance within the Exchange and DExchange.
How to create DAI?
DAI creation depends on two factors:
- User and collateral
- Maker Vaults
We must first have the capital to create the collateral. Currently accepted Basic Attention Token (BAT), USDC, WBTC, TUSD, KNC, ZRX, MANA y ETHER.
If you do not have any of them, you must change your tokens to those mentioned to work with DAI.
To operate with Maker Vaults you must download the DApp Oasis that allows you to create them using MetaMask, Trezor or Ledger wallets.
Once inside, you connect the DApp to the wallet.
Decentralized transaction thanks to smart contracts
The protocol and smart contracts allow decentralized operation. There is no custodian or middleman. Everything is managed between the user and the smart contract. You do not need personal data, just possess ERC-20 or Ether token.
Maker Vault takes your money to generate a certain amount of stable currency for your guarantee And with the excess of it, it allows the system to remain stable against the decrease or increase in the price of the ERC-20 token or the Ether that you have used.
Liquidate your position, seek to cover the debt of the DAI issue, and repay as much money as possible.
This saves your warranty in the maker system and gives you DAI. The amount generated is relative to the guarantee placed. The relationship is dependent on each collateral and may change based on MakerDAO governance decisions.
The ratio of DAI to Ether is 150%. For every $ 1.5 in Ether, you will get $ 1 in DAI. For example, if you send $ 125 in Ether, you will get about $ 50 in DAI from them. The rest of the money is blocked there and is an excess guarantee to compensate for the drops or rises that the price of Ether may have.
What are its pros and cons?
Like all blockchain, DAI also has its pros and cons.
We can list the following
- It is a secure, decentralized stablecoin with an extensive safety record
- It does not depend on banks, being a totally different stablecoin to USDT
- It facilitates the creation of means of exchange and decentralized financing. DAI is one of the most widely accepted DeFi and DEX currencies in the world today.
- In worst case scenarios, MakerDAO has been able to maintain stability at acceptable values, and in fact, has improved stability over time
- It is easily accessible and respects the privacy of its users
- Ability to generate credit and interest for said credit, becoming a powerful option to invest
- It is one of the largest DeFi ecosystems in the world, with a value to exceed 1.4 billion dollars as of September 2020
- It is a stablecoin accepted in many exchange houses
On the negative side we can mention:
- It’s a bit complex on a technical level
- The limited variety of currencies as collateral is seen as a system problem
- A smart contract is transparent and immutable, but it can be hacked
It should be noted that there are risks when using a Maker Vault as you must transfer ownership of the assets to a smart contract that can sell your assets in the event of a market downturn. Any DAI generated vault has a settlement price, the price of the underlying asset. The use of leverage is an additional risk. The potential for reward is greater through this, but the potential for loss is also magnified. It is a common practice among users to maintain a high collateral ratio to protect themselves from market risks and therefore liquidation.
Javier Molina “DAI is the true decentralized StableCoin”
We consulted our expert and professor in the cryptocurrency investment course, Javier Molina, about the particularities of this stable coin.
-DAI keeps a part of the transaction as collateral. Does this also happen with other stablecoins?
There are different types of collateral. In the case of DAI, you have to “overcollateralize” because you use other crypto assets whose volatility is very high. An algorithmic system is responsible for maintaining the stability of DAI. In the case of USDC or USDT, for each USD contributed one of these stable currencies is mined, that is, one USD must be left in a “bank” as collateral.
-Does the fact of being totally decentralized make it more reliable in terms of the spirit of blockchains?
Undoubtedly. DAI is the true decentralized StableCoin and an example of how an asset can be created in that ecosystem. It is governed by a DAO which gives it greater real decentralization.
-What percentage of approximate effective use is there of DAI?
DAI applications are being diverse. On the remittances side, and due to their low cost, there has been a constant increase in their use. As a form of savings, using deposits. In the page “daistats” Existing volumes can be viewed, reaching $ 9.3 billion equivalent.