For so long, we have been trying hard to get to know the intricacies of how DAI works and what’s the underlying mechanism for it. Surprisingly, we swept the confusion and have come with an explicit explanation for it.
Start off with a simple term, what is DAI- DAI is a stable coin that equals the dollar price, making it more simple: 1 DAI = 1 Dollar.
DAI crypto is mainly used for lending and borrowing; in the bull run of drastic escalation and de-escalation, recently, Bitcoin astonishingly dropped when Elon Musk announced that “Tesla” won’t accept Bitcoin as a payment method. It left the investors in ultimate chaos, shocking them with substantial price fluctuations.
How DAI became the most popular cryptocurrency in the Defi space?
A recent thing resonating these days is how DAI is the most popular cryptocurrency in the Defi space.
Decentralized Finance (Defi) has gained traction and is a rapidly growing movement that entails payment solutions, ending platforms, asset management services, decentralized exchanges and marketplaces, crypto wallets, and applications built on the Ethereum blockchain.
Defi operates on Ethereum, which integrates various types of digital assets, Maker Protocol’s decentralized Dai stable coin has become the most used cryptocurrency in the Defi space. Unlike the conventional fiat-backed stable currencies, Dai is decentralized, pegged with the U.S dollar, and backed by crypto-assets.
The Maker Protocol facilitates the user to generate DAI from anywhere globally, which guarantees higher security and transparency from blockchain technology.
What is Maker DAO? Why is DAI preferred?
Maker DAO (an Ethereum-based protocol) is built on the Ethereum-blockchain, and the Maker’s Dai stable coin sets a better track for the financial services sector across the globe. DAI stable coin is transparent, borderless, and soft-pegged to the US Dollar; it assists with the stability most crypto-coins lack. DAI is a stable coin offering liquidity and constant stability in a volatile crypto world which other stable coins can’t. Without involving an intermediary, MakerDAO provides collateral-backed loans in the form of stable coins. MakerDAO has risen to become one of the most popular protocols in the crypto ecosystem due to its integration with Defi.
What makes DAI different from other stable coins?
The Maker DAO stable coin, Dai, differs from other stable coins because it is decentralized. No one can control the issuance of Dai; to maintain its peg to the U.S. dollar it uses collateral in the form of Ethereum-based assets. A decentralized autonomous organization (DAO) governs MakerDAO, which is governed decentralized by holders of its MKR token.
A liquid market necessitates liquidity, and Dai offers it!
When we talk about liquidity, we are referring to how quickly and readily assets can be turned into cash. The Defi movement requires liquidity in order to build successful projects based on Ethereum and the Maker Protocol. The failure of a project is driven by its inability to provide enough liquidity to motivate user adoption. A decentralized liquidity pool of tokens in smart contracts can be shared across platforms, liquidity pools help people gain faith in projects that don’t yet have a large user base.
How Shared Liquidity Increases Trading Volume?
Subsequently, shared liquidity boosts up the trading volume, which captivates the user’s interests thus attracting even more users. With liquidity, projects can focus on providing users with what they want. The scaling of the project becomes easier with more and more users enjoying a project.
In a similar way to Bitcoin, owing to a high-security priority, Defi protocols are designed without much room for agile development. Eventually, these systems gain more inertia when updating their interfaces to new liquidity pools, which leads to enhanced "stickiness" to assets initially.
Dai and The Shared Liquidity!
Over the past few years, Dai has secured a significant market share that seems to be growing with the shared liquidity. The liquidity could only be prevalent and applicable to the system, when the platform has access to an unbiased, stable unit of account, such as Dai.
The Concept of Collateralized Debt Position (CDP)
Now roll in with the concept of Collateralized Debt Position (CDP), these contracts operate on Ethereum's blockchain and hold collateral until the borrowed Dai is returned. CDP is a cryptocurrency that offers a possible solution to the high volatility of the current cryptocurrency market by using a stable coin named Dai.
Talk about Pegging! What is Pegging?
We have been talking about pegging lately, what does that mean? Pegging is downright important, let’s initiate our discussion with our frequent text “A stable coin is pegged to another stable asset”. Well, Pegging is a practice that fixes the pertinent exchange rate of one currency to the value of another currency.
In continuity with our present discussion, the Dai stable coin is pegged to the US dollar. This burgeoning sector gains a great deal of new financial possibilities with the inception of a stable coin, which was not previously possible because of volatility.
Dai not only offers stability, but it also offers transparency and decentralization, since it is built on top of the Ethereum network. Your collateral must be worth more than the value of the Dai you are issued. The fact that you must lock up collateral might seem like a disadvantage, but it allows you to invest in riskier assets and receive a secure asset in return.
How to Transact a Dai Stable coin?
The MakerDAO allows you to transact a Dai stable coin loan if the collateral is approved by MakerDAO's owners. Ethereum, ZRX, and OMG are examples of assets that are eligible for collateral. Dai is one of the most integrated digital assets in the blockchain once it is borrowed. It is mostly used in the decentralized finance (Defi) community and within the rapidly growing cryptocurrency and collectibles industry.
Unleashing the Details behind the Deposit!
By depositing Dai into the Dai Savings Rate (DSR), which is funded by Maker collateral vault owners and available to every Dai holder, Dai holders can earn interest on their deposits. In the DSR, you do not have to relinquish control of funds, and you can withdraw your Dai whenever you wish.
Holders of MKR determine the Dai Savings Rate based on market conditions. Current rates range from 0% to 8.75%. If you want to receive the collateral locked up in the Maker vault, you must pay back the borrowed Dai and the annual percentage yield fee first.
The decentralized and open nature of Ethereum and Maker Protocol strives to make a better financial system that works for every department and individual. These high-end preliminaries of Dai and Maker DAO improve businesses, making it more accessible. The pioneer platform is introducing new technology to the economy— new financial opportunities are being created and are on their way to flood the world with wonders.