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Introduction to Maker: What is Dai (DAI)?

Introduction to Maker: What is Dai (DAI)?


Have you heared the term DAI i.e. DAI blockchain or DAI stablecoin cryptocurrency? Let’s dive in to learn what it is!

Blockchain technology has offered many conclusive opportunities for addressing the growing levels of frustration with random centralized financial systems. It enables distribution of data throughout a network of computers, thereby allowing more transparency in comparison to centralized control. As a result, blockchain can offer a neutral, transparent, and high-performance permissionless system for improving global economic and financial structures. 

The DAI blockchain project is one of the notable entities in the world of cryptocurrencies. As a stablecoin, it has been tailored for reducing price volatility with the Maker protocol. You must be eager to learn more about DAI stablecoin and how it serves value in the modern crypto ecosystem. The following discussion offers you everything you need to understand about DAI and its applications.

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MakerDAO and Maker Protocol 

The discussions on “What is DAI” would be incomplete without a fundamental understanding of MakerDAO and Maker protocol. MakerDAO is a Decentralized Autonomous Organization or DAO project based on the Ethereum blockchain. Created in 2014, MakerDAO follows the precedents of decentralized governance through the governance token MKR. The MakerDAO platform features a unique system of governance with a combination of governance polling and executive voting. 

MKR token holders have the responsibility of managing the Maker protocol alongside the financial risks associated with DAI coin for better efficiency, stability, and transparency. The voting privileges of MKR token holders are directly proportional to the number of tokens they contribute to the voting contract. So, what is the Maker Protocol in MakerDAO? You can think of Maker Protocol as the lifeblood of the MakerDAO platform. 

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Importance of Maker Protocol

The Maker Protocol is a significant highlight in understanding the MakerDAO DAI interplay effectively. Maker Protocol, also referred to as Multi-Collateral DAI or MCD system, helps users in generating DAI by using collateral assets approved by the community. In the initial days of MakerDAO, somewhere in 2015, many developers started working together on the early aspects of documentation, architecture, and coding. The first formal whitepaper by MakerDAO in 2017 introduced the original DAI stablecoin cryptocurrency ecosystem.  

The whitepaper showed the method for generating DAI through MakerDAO by using ETH-backed assets as collaterals. MakerDAO utilized unique smart contracts where users can deposit collateral, thereby terming them Collateralized Debt Positions or CDPs. However, Maker Protocol evolved beyond the limitations of accepting only ETH as collateral. Today, the Maker protocol allows collateral in any Ethereum-backed asset. You must be wondering about the place of DAI in the Maker protocol.

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What is DAI Stablecoin?

As you must have noticed now, Maker Protocol serves as one of the foremost DeFi applications allowing users to generate DAI stablecoins. The DAI coin is a stablecoin or a decentralized, neutral cryptocurrency, which you can store in crypto wallets or exchanges. Another important highlight about DAI is that Ethereum and other popular blockchain platforms support the platform. MakerDAO users can generate DAI easily through depositing collateral assets in the Maker Vaults available in the Maker Protocol. This can ensure circulation of DAI, thereby facilitating liquidity to users. 

You can also get MakerDAO DAI stablecoin from crypto exchanges, brokers, or just as means of payment for goods and services. Once you have generated, purchased, or received DAI, you can use it just like any other cryptocurrency. In addition, you can also use an interesting feature of DAI Savings Rate or DSR in the Maker Protocol for using DAI as savings. The unique highlights of DAI rely prominently on the backing of excess collateral, thereby enabling higher collateral value in comparison to the DAI debt value. Let us take a detailed look into how DAI stablecoin is different from others.

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Unique Traits of DAI Stablecoin 

Since its launch in 2017, the DAI stablecoin cryptocurrency has garnered profound levels of attention. What makes it special in comparison to other popular alternatives such as Tether USDT? Here are some of the unique features of DAI which can help you find a suitable answer. 

Guarantee for Decentralization

The simple overview of “What is DAI” generally paints it as another stablecoin in the market. However, MakerDAO opts for a different model for DAI to ensure promising levels of decentralization. For example, other stablecoins need the backing of a reserve of fiat assets, which is generally under a centralized organization. 

On the contrary, you don’t have any centralized entity for issuing DAI as MakerDAO runs on distributed governance. As a matter of fact, users who want DAI have to deposit Ethereum-backed assets in a smart contract. The smart contract then uses the assets as collateral for soft-pegging DAI against the US dollar. 

Multi-Collateral Functionality

Another striking highlight of the DAI coin refers to the flexibility for accepting multiple collaterals. In the case of many other stablecoins, the collateral is generally a single fiat currency or a specific cryptocurrency. On the contrary, DAI offers support for using different cryptocurrencies as collateral. For example, DAI accepts ETH, Compound token or COMP, Brave Attention Token or BAT, and USD Coin or USDC. 

Although Maker protocol supported collateral deposits in ETH only in the initial days, it has evolved as an effective multi-collateral stablecoin system. With the support for cryptocurrencies as collateral, DAI can effectively reduce user risk alongside increasing price stability. On top of it, the MakerDAO community continues the introduction of new collateral options through voting.

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Another promising implication associated with the MakerDAO DAI stablecoin system is the DAI Savings Rate or DSR. The DAI Savings Rate is an exceptional tool that helps DAI token holders in earning interest on their DAI holdings. The native token holders of MakerDAO or MKR owners have the privilege of determining the DAI Savings Rate or DSR through voting. 

As a matter of fact, MKR token holders serve as the guarantors for DAI, implying the liquidation of MKR tokens in event of a system crash. MKR token holders receive rewards for ensuring the proper functionality of the collateralized tokens and the DAI system in general.

Working of DAI Stablecoin 

The detailed overview of the foundation of DAI and its unique traits must have offered a comprehensive idea of how it works. The DAI stablecoin cryptocurrency is actually an ERC-20 token; you can purchase it on centralized as well as decentralized exchanges. In addition, you can also generate or borrow DAI by using the Maker collateral vault in the MakerDAO Oasis Borrow dashboard. 

You can deposit the Ethereum-based collateral assets through the dashboard with effective ease. The Maker collateral vaults are basically smart contracts that hold the collateral assets in escrow until the DAI borrowed is returned. If the value of the collateral assets falls below the value of the DAI borrowed, then the collateral is liquidated.

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How Can I Generate DAI?

Another important aspect in an introductory guide to “What is DAI” would also focus on ways to generate the stablecoin. You can leverage different supported collateral assets for generating DAI through the Maker Protocol. The Maker Protocol uses smart contracts, known as Maker Vaults, for depositing collateral assets. You can access the Maker Protocol for creating vaults by leveraging different user interfaces or network access portals like Oasis Borrow. 

In addition, you can also use other interfaces developed by the community for depositing collateral assets to generate DAI. You don’t have to go through any complex steps for creating a vault. However, you also have an obligation to repay the DAI generated alongside the stability fee in the MakerDAO DAI creation process. The stability fee is an important requirement for withdrawing the collateral deposited in a vault. Here are some steps you can follow for interacting with a Maker Vault. 

Create and Configure a Vault

Create a Vault on Maker Protocol by using the Oasis Borrow dashboard or other interfaces such as Zerion. Add the required amount of collateral assets you need for generating DAI, and you have a collateralized vault. 

Generate DAI from the Vault

The owner of a Vault has the privilege of initiating a transaction, followed by its confirmation in the unhosted cryptocurrency wallet. Users can generate a specific amount of DAI based on the amount of collateral they deposit in the Vault.

Return the Debt and Stability Fees

Vault owners must pay the DAI generated back to the Maker Protocol for retrieving their collateral. In addition, you have to provide a stability fee in DAI. 

In the final step, you can withdraw all or some of your collateral from the Vault to your wallet. Remember that you can withdraw collateral only after returning DAI and paying the stability fee. 

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Final Words

The DAI stablecoin cryptocurrency is a comparatively innovative improvement over the existing stablecoins in the market. It enables the scope for distributed governance in stablecoin systems, thereby introducing the scope for true decentralization for stablecoins. Without the need for any reserve of fiat currency or cryptocurrencies, DAI stablecoin relies on collateral assets for soft-pegging its value against the US dollar. 

Users can access the Maker Protocol and generate DAI by depositing Ethereum-backed assets as collateral. In addition, you can retrieve the collateral only after repaying back the DAI alongside a stability fee. From a broader perspective, DAI is an innovative take on stablecoins and can serve as a vital asset in crypto. Learn more about DAI in detail and explore its functionalities.

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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!

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