What is the use of Dai? The concept, value and practical application of Dai

Dai, a stablecoin developed by MakerDAO, maintains a $1 USD value by being collateralized by Ethereum and regulated through smart contracts.

Oct 05, 2024 at 03:17 pm

What is Dai?

Dai is a decentralized, crypto-collateralized stablecoin developed by MakerDAO. It is designed to maintain a stable value of $1 USD by being backed by a basket of cryptocurrencies, primarily Ethereum (ETH).

Concept of Dai

Dai is a stablecoin, meaning its value is pegged to a real-world asset (in this case, the US dollar). This is different from other cryptocurrencies, which often experience significant price volatility. The stability of Dai is achieved through a system of collateralization and smart contracts.

Collateralization

Dai is collateralized by ETH, which is locked in MakerDAO's smart contract vaults. The amount of ETH required as collateral varies depending on the market conditions but generally remains at a ratio of over 150%. This means that for every $1 of Dai minted, there is at least $1.5 worth of ETH deposited into the vault.

Smart Contracts

MakerDAO's smart contracts enforce the collateralization ratio and manage the issuance and burning of Dai. If the value of ETH in the vault ever falls below the required threshold, a process called "liquidation" occurs, where the ETH is sold to ensure that the Dai stability remains intact.

Value of Dai

The value of Dai lies in its stability and its use as a cryptocurrency.

• Stability: Dai provides a stable store of value, making it suitable for use in payments, savings, and other financial applications.
• Cryptocurrency: Dai is a cryptocurrency that can be traded, sent, and received like other digital assets. It is widely accepted in the decentralized finance (DeFi) ecosystem.

Practical Applications of Dai

• Payment Rails: Dai can be used as a stable payment currency for both online and offline transactions. Its stability ensures that merchants and customers do not have to worry about price fluctuations.
• Collateralization: Dai can be used as collateral for other DeFi applications, such as lending and borrowing platforms. Its stable value reduces the risk of collateral calls.
• Stablecoin Lending: Users can lend out their Dai on platforms like Compound or Aave to earn interest. The stable nature of Dai makes it an attractive option for lenders seeking low-risk passive income.
• Cryptocurrency Savings: Dai can be stored in cryptocurrency wallets as a stable store of value, providing a cushion against market volatility.
• Cryptocurrency Trading: Dai can be used as a stable base pair in crypto trading, allowing traders to reduce their exposure to price fluctuations.