DAI (or DAI, formerly Sai or SAI) is a stablecoin token on the

Ethereum Ethereum is a decentralized blockchain with smart contract functionality. Ether (abbreviation: ETH) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capitalization. It is open-s ...

blockchain The blockchain is a distributed ledger with growing lists of Record (computer science), records (''blocks'') that are securely linked together via Cryptographic hash function, cryptographic hashes. Each block contains a cryptographic hash of th ...

which uses

smart contracts A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. The objectives of smart contracts are the re ...

designed to control supply to keep its value as close to one

United States dollar The United States dollar (Currency symbol, symbol: Dollar sign, $; ISO 4217, currency code: USD) is the official currency of the United States and International use of the U.S. dollar, several other countries. The Coinage Act of 1792 introdu ...

as possible. DAI is maintained and regulated by MakerDAO, a

decentralized autonomous organization A decentralized autonomous organization (DAO), sometimes called a decentralized autonomous corporation (DAC), is an organization managed in whole or in part by decentralized computer programs, with voting and finances handled through a decent ...

composed of the owners of its governance token, MKR, who may propose and vote on changes to certain

parameter A parameter (), generally, is any characteristic that can help in defining or classifying a particular system (meaning an event, project, object, situation, etc.). That is, a parameter is an element of a system that is useful, or critical, when ...

s in its smart contracts. MakerDAO was described in a 2020 ''Bloomberg'' article as the first example of a

decentralized application A decentralised application (DApp, dApp, Dapp, or dapp) is an Application software, application that can operate autonomously, typically through the use of smart contracts, that run on a decentralized computing, blockchain or other distributed le ...

to receive significant adoption.

Overview

DAI is created and destroyed through an overcollateralized

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

and repayment process facilitated by MakerDAO's smart contracts in the form of a decentralized application. Users who deposit one of the accepted collateral types (such as

Ether In organic chemistry, ethers are a class of compounds that contain an ether group, a single oxygen atom bonded to two separate carbon atoms, each part of an organyl group (e.g., alkyl or aryl). They have the general formula , where R and R� ...

) into a contract are able to mint new DAI, as a loan, against the value of their collateral. The USD value of the collateral at any given time divided by the amount of DAI borrowed is the loan's "collateralization ratio"; this is calculated using the USD price of a unit of the collateral asset as reported regularly to a contract by a set of decentralized oracles. Each loan type has a fixed minimum collateralization ratio, which is usually in the range of 110-200%. If the collateralization ratio of a loan falls below the minimum ratio, anyone may call a certain function of the contract to cause a portion of the collateral to be sold for DAI on a decentralized exchange, which is then used to pay off the debt and pay a reward to the account that called the function. Setting a minimum ratio well above 100% provides enough time to sell the collateral to cover the debt in the event of a

flash crash In modern finance, a flash crash is a very rapid, deep, and volatile fall in Security (finance), security prices occurring within a very short time period followed by a quick recovery. Flash crashes are frequently blamed by media on trades execute ...

in the price of the collateral asset; generally, the lower a minimum ratio is, the higher the

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

rate will be, to offset the

systemic risk In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the ...

. Upon repayment of the loan and its accrued interest, the returned DAI is automatically destroyed, and the collateral is made available for withdrawal. In this way the

USD The United States dollar (symbol: $; currency code: USD) is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it int ...

value of DAI can be said to be backed by the USD value of the underlying collateral held by MakerDAO's smart contracts. By controlling the types of accepted collateral, minimum collateralization ratios, and the

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

s for borrowing or storing DAI, MakerDAO is able to control the amount of DAI in circulation, and thus its value. The ability to propose and implement changes to such variables is granted, through code, to holders of the MKR token. Owners of the governance token are able to vote on proposed modifications in equal proportion to the amount of tokens they hold. The MKR token also serves as an investment in the MakerDAO system. Added interest that borrowers pay back, on top of their loan's principal, is used to buy MKR tokens from the market and "burn" them, taking them permanently out of circulation. This mechanism aims to make MKR

deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% and becomes negative. While inflation reduces the value of currency over time, deflation increases i ...

ary in correlation to the revenues from lending DAI.

History

MakerDAO was formed in 2014 by Danish entrepreneur Rune Christensen. According to Christensen, the name of the cryptocurrency is based on the Chinese character , which he translated as "to lend or to provide capital for a loan". On December 18, 2017, DAI was launched on the main

network. The price of DAI was successfully kept close to one

US dollar The United States dollar (symbol: $; currency code: USD) is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it int ...

during its first year of existence, even though the price of

, the only collateral available at the time, declined by more than 80% during the same time period. In September 2018, venture capital firm

Andreessen Horowitz AH Capital Management, LLC (commonly known as Andreessen Horowitz, or a16z) is an American privately held venture capital firm, founded in 2009 by Marc Andreessen and Ben Horowitz. The company is headquartered in Menlo Park, California. As of M ...

invested $15 million in MakerDAO by purchasing 6% of all MKR tokens. In 2018, MakerDAO formed the Maker Foundation, run from

Copenhagen Copenhagen ( ) is the capital and most populous city of Denmark, with a population of 1.4 million in the Urban area of Copenhagen, urban area. The city is situated on the islands of Zealand and Amager, separated from Malmö, Sweden, by the ...

, which funds projects in the system, such as the writing of code needed for the platform to function and adapt. In 2019, MakerDAO experienced an internal struggle over whether to integrate more with the traditional financial system. Christensen wanted greater regulatory compliance to allow for assets besides cryptocurrency to serve as collateral for DAI. The struggle led to the departure of MakerDAO's CTO. In March 2020, as a result of market volatility at the onset of the

COVID-19 pandemic The COVID-19 pandemic (also known as the coronavirus pandemic and COVID pandemic), caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), began with an disease outbreak, outbreak of COVID-19 in Wuhan, China, in December ...

, DAI experienced a deflationary

deleveraging At the microeconomics, micro-economic level, deleveraging refers to the reduction of the leverage ratio, or the percentage of debt in the balance sheet of a single economic entity, such as a household or a firm. It is the opposite of leverage (fina ...

spiral that, at its peak, caused it to trade for up to

$1.11 before returning to its intended $1.00 valuation.

References

External links

* {{Cryptocurrencies Stablecoins Ethereum tokens Cryptocurrency projects

Overview

History

See also

References

External links