DAI is a stablecoin designed to bring price stability in crypto’s volatile markets, using collateralization and smart contracts aligned with decentralized finance (DeFi). Furthermore, DAI can be used as an effective hedge against market volatility or for borrowing against other assets; further offering users low-cost remittances, reduced trading costs in cryptocurrency markets and the opportunity to mitigate risk during periods of extreme cryptocurrency market volatility.
DAI stands out from other stablecoins by being backed by crypto collateral instead of fiat currencies – an unusual approach considering most stablecoins rely on centralised entities for backing reserves such as USDC issued by Circle. Unfortunately, however, this exposes DAI to various risks; firstly if USDC de-pegs or Circle freezes funds backing DAI it could suffer significantly in value – potentially losing value altogether and devaluing DAI itself.
DAI is backed by crypto collateral stored in Maker Vaults; with Ethereum making up 66% of DAI’s current circulating supply. When users deposit ETH into a Maker vault, DAI is created and loaned out at a 1:1 collateral-to-loan ratio; once paid back by its borrower, their asset will be released back from Maker vault and the DAI destroyed.
DAI is supported by multiple other cryptocurrencies, such as Pax Dollar (USDP), Basic Attention Token (BAT), Wrapped Bitcoin (WBTC), and Compound (COMP). This increases diversification, which improves stability. Furthermore, DAI employs additional mechanisms to safeguard its stability, such as over-collateralization and using stability fees.
DAI provides users in unstable or weak economies a secure store of value they can use with any Ethereum wallet – this makes saving in a digital format even more advantageous as it protects purchasing power against hyperinflation or devaluation. Additionally, this currency can be used for sending remittances overseas without incurring expensive bank transfer costs.
DAI is an increasingly popular stablecoin due to its ease of use, stability and integration with DeFi. To protect the safety of your investment in DAI tokens, we advise storing them in an encrypted wallet such as Ledger or Trezor as they offer superior levels of protection. Likewise, to prevent being victims of fraud or theft we advise spending them only with platforms or projects with solid governance practices so you don’t find yourself out-maneuvered by fraudulent schemes.