DAI

Definition

DAI is a decentralized stablecoin that aims to maintain a stable value against the US dollar through smart contracts on the Ethereum blockchain. Unlike traditional fiat-backed stablecoins, DAI is collateralized by various cryptocurrencies, allowing users to borrow and lend while minimizing volatility. This makes DAI a key player in both lending platforms and as a stablecoin within the decentralized finance ecosystem.

5 Must Know Facts For Your Next Test

1. DAI is generated through the MakerDAO platform by locking up assets like ETH or BAT as collateral in smart contracts.
2. DAI's value stability is achieved through mechanisms such as incentivizing over-collateralization and using price feeds to adjust collateral requirements.
3. Users can borrow DAI by depositing collateral and must manage their positions to avoid liquidation if the collateral value drops significantly.
4. Unlike centralized stablecoins, DAI operates without a single controlling entity, making it more resistant to censorship and manipulation.
5. DAI can be utilized across various decentralized finance applications, including lending protocols, liquidity pools, and decentralized exchanges.

Review Questions

• How does DAI maintain its value stability compared to traditional fiat-backed stablecoins?
  • DAI maintains its value stability by being over-collateralized with various cryptocurrencies rather than being backed directly by fiat currency. This means that for every DAI created, there is more value locked up in collateral than the DAI itself is worth. If the price of collateral drops, mechanisms within the MakerDAO system adjust the required collateralization ratio or trigger liquidations to keep DAI's peg to the US dollar intact.
• What role does MakerDAO play in the creation and management of DAI, and how does this influence decentralized lending and borrowing?
  • MakerDAO facilitates the creation and management of DAI by allowing users to deposit collateral in exchange for DAI loans. This decentralized governance structure means that decisions about DAI's stability mechanisms, such as interest rates or liquidation thresholds, are made collectively by MKR token holders. This decentralized approach empowers users to participate in lending and borrowing activities without relying on traditional financial institutions, thus democratizing access to financial services.
• Evaluate how DAI's decentralized nature impacts its adoption in the broader cryptocurrency ecosystem and its potential risks.
  • DAI's decentralized nature promotes wider adoption within the cryptocurrency ecosystem by providing an alternative to traditional finance that is less susceptible to control or censorship. However, this decentralization also introduces potential risks such as smart contract vulnerabilities or governance issues that could impact DAI's stability. The reliance on external price feeds for collateral valuation also poses risks during extreme market conditions, potentially affecting user trust and adoption rates as they navigate these challenges.

Related terms

MakerDAO: A decentralized autonomous organization that manages the DAI stablecoin and allows users to create DAI by collateralizing their cryptocurrencies.

Collateralization Ratio: The ratio of collateral value to the value of DAI issued, which helps ensure that the system remains over-collateralized to maintain stability.

Stablecoin: A type of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency like the US dollar or a commodity.