If you are starting in the world of cryptocurrencies, you have probably heard the term stablecoin and wondered what it means.
Stablecoins are a special type of cryptocurrency whose value is designed to remain stable, usually linked to a traditional currency like the dollar. This makes them less volatile than other cryptos, like Bitcoin or Ethereum. And this is where Dai comes in, one of the most popular stablecoins.
In this article, we will explain to you in a simple way what Dai is, how it works, and why it can be a useful tool for both beginners and experts in cryptocurrencies.
Basic Data
Name: Dai
Acronym: DAI
Year of launch: 2017
Maximum issuance: Infinite
What is Dai about?
Dai is a stable cryptocurrency created by MakerDAO, a decentralized organization. Its main objective is to maintain a value equivalent to the US dollar (1 Dai = 1 USD). The significant difference of Dai compared to other stablecoins is that it is not backed by money in a bank account, but by cryptocurrencies.
In other words, while some stablecoins have dollar reserves in the bank to guarantee their value, Dai uses a system based on blockchain and smart contracts to maintain its stability. This means that it is completely decentralized and does not rely on any financial institution.
How does Dai work?
The magic behind Dai happens on the Ethereum network, using smart contracts and a system called Maker Protocol. This is the simplified process:
Loans backed by cryptocurrencies: People who wish to generate Dai must lock (or 'collateralize') cryptocurrencies like Ethereum (ETH) in a smart contract. These cryptocurrencies act as collateral to issue the Dai.
Stability through over-collateralization: To protect the value of Dai, the system requires that the collateral be greater than the requested amount. For example, if you want to create 100 Dai, you must lock cryptocurrencies worth more (say 150 USD in ETH). This reduces the risk of the system collapsing if the price of cryptocurrencies fluctuates.
Automatic adjustment mechanism: The Maker Protocol adjusts certain parameters, such as interest rates, to keep the value of Dai close to 1 USD. If cryptocurrency prices fall, the collateral may be liquidated to cover the issued Dai.
Total flexibility: Once you return the Dai to the system, you recover the locked cryptocurrencies. This creates a dynamic cycle that ensures the stability and operability of the stablecoin.
The main advantages of Dai
We have already seen that Dai is decentralized and stable, but what makes it so special? These are its main advantages:
Total decentralization: Unlike other stablecoins like USDT or USDC, Dai does not rely on a centralized company that holds its reserves in banks. Instead, the entire system is automated and managed on the Ethereum network.
Reliable stability: Thanks to its design, it maintains its 1:1 ratio with the dollar, making it an ideal option to protect yourself from the typical volatility of cryptocurrencies.
Global accessibility: As a cryptocurrency, you can send and receive Dai anywhere in the world without relying on banks or intermediaries.
Total transparency: The entire operation of Dai can be audited, as the smart contracts are public, and anyone can verify the amount of collateral backing the issued Dai.
Ideal for multiple uses: You can use Dai to save, send money to other countries, or as part of advanced investment strategies in the DeFi (decentralized finance) world.
Why is Dai important?
Dai is not just a stable cryptocurrency; it is also an example of how blockchain technology can create more accessible and global financial systems. For new users in the crypto ecosystem, Dai represents a safe and easy-to-understand gateway, while for more advanced users, it is a key tool for operating on DeFi platforms.
If you are looking for a way to protect the value of your funds in a digital ecosystem, without the volatility of other cryptos, Dai may be what you need.
In summary, Dai combines the best of cryptocurrencies with the stability of traditional currencies. It is evidence that decentralized finance can be accessible, reliable, and useful for anyone, regardless of their experience in the crypto world.