DAI is an ERC20 token on the Ethereum blockchain that has a stable value equivalent to 1 USD. It is also the key to the MakerDAO lending system.

There are many stable digital coins, but only one can be widely used, decentralized and trustless. In this article, we will look at why DAI stands out from other stablecoins.

Cryptocurrencies with stable values ​​are not new or rare. Tether has been around for many years now and is by far the largest capitalization stablecoin. Besides Tether, there are also other stablecoins such as USDC, PAX, Gemini Coin and Facebook's Diem (formerly Libra). All compete to be the stablecoin of choice, but all rely on trusting the issuer to honestly hold USD collateral in the bank. DAI changed that.

What is DAI?

DAI is an ERC20 token on the Ethereum blockchain with a stable value equivalent to 1 USD. It is also the key to the MakerDAO lending system. When a loan is made on MakerDAO, DAI is generated. It is the currency that users borrow and pay back. DAI simply functions as a stable Ethereum token. DAI can be used for payments and is easily transferred between Ethereum wallets.

What's special about DAI?

The price of DAI is controlled through a system of automatically executing smart contracts. If the price of DAI fluctuates too far from 1 USD, Maker tokens (MKR) will be burned or created to stabilize the price of DAI.

MakerDAO's algorithms automatically manage the price of DAI, so there's no need for a trusted person to help keep the coins stable. When the system works like this and 1 DAI is equivalent to 1 USD, MKR holders will benefit as 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 $1 price peg.

Since DAI is simply a token on Ethereum, anyone can use or build with DAI without permission. As an ERC20 token, DAI acts as a building block that can be incorporated into any decentralized application (dapp) that needs a stable asset or payment system.

Developers can also wrap DAI in different smart contracts and modify it for different uses. For example, xDAI exchanges for DAI and puts it on a super-fast, low-cost sidechain to make transfers and payments easier and more efficient. Chai and rDAI exchange for regular DAI, putting it into an interest-generating pool and allowing users to control interest as it accumulates.

How is DAI produced?

DAI is created when users borrow money on MakerDAO. DAI is destroyed when the loans are paid back.

How to get DAI tokens?

The most direct way to get DAI is to borrow money on MakerDAO's Oasis platform. You can also trade DAI on that platform or via a centralized exchange like Coinbase.

What can be done with DAI?

One of the main uses of DAI is as a hedge or stable counterweight against the volatility of popular crypto assets such as Ethereum or Bitcoin. The stable value of DAI is beneficial for investors or traders who believe that the market is about to go down.

Because DAI is stable, it is also one of the most ideal crypto assets to spend. The Coinbase Card allows users to spend DAI and other crypto assets by converting crypto to fiat on a Visa card.

DeFi and DAI

The decentralized finance (DeFi) boom of 2020 has seen DAI emerge as one of the most popular assets in the DeFi ecosystem. Several services have appeared offering loans on DAI deposits.

Coinbase customers from the US, UK, Netherlands, Spain, France and Australia can earn two percent per year on their DAI deposits.

A dapp called dPiggy not only allows users to earn interest but also automatically uses their earnings to purchase a variety of crypto assets at the end of each month.

Bitcoin can now also be used to generate DAI.