Currently, there are over 20 stablecoins in the cryptocurrency space. DAI stands out as the first decentralized USD-pegged stablecoin backed by crypto collateral. Functionally similar to Tether (USDT), DAI maintains a 1:1 peg to the US dollar but operates on a completely different, trustless issuance model. This guide breaks down how DAI works and explores its connection to the Maker (MKR) token.
1. What Is DAI?
DAI is an ERC-20 USD stablecoin issued on the Ethereum blockchain. Each DAI is algorithmically stabilized at ~$1 via Collateralized Debt Positions (CDPs)—autonomous smart contracts that eliminate human intervention. Unlike centralized stablecoins (e.g., USDT), which rely on audited fiat reserves, DAI’s value is secured by overcollateralized crypto assets, enforced by immutable code.
Stablecoins Explained
Stablecoins are cryptocurrencies designed to minimize price volatility, often pegged to fiat currencies or commodities. Popular USD-backed alternatives include USDC, BUSD, and TrueUSD. Their utility spans global transactions, remittances, and hedging against crypto market fluctuations—24/7 settlement, low fees, and borderless accessibility.
2. How DAI’s Issuance Mechanism Works
DAI is minted through overcollateralization. For example:
- Current ETH collateral ratio: 150% (average: 177%).
- To generate 1 DAI, you must lock ≥$1.50 worth of ETH (e.g., 0.01 ETH at $177/ETH).
- Redeeming collateral requires repaying the DAI debt + a 2% stability fee (varies by asset type).
Initially, DAI only accepted ETH as collateral. Post-November 2019, it expanded to include WBTC, USDC, and others to diversify risk.
SAI vs. DAI
- SAI: Single-collateral DAI (ETH/BAT only), phased out post-multi-collateral upgrade.
- DAI: Current multi-collateral version. Both theoretically maintain a $1 peg, though minor exchange price deviations may occur.
2.1 How Smart Contracts Handle Collateral Volatility
- Price increase: No action needed (collateral value > DAI debt).
- **Price drop (e.g., ETH falls to $150)**: The CDP triggers liquidation—collateral is auctioned to cover the DAI debt, preserving the $1 peg.
During the March 2020 crypto crash, ETH’s sharp decline caused a $4M DAI shortfall, resolved by minting MKR tokens as a backstop.
3. Maintaining the $1 Peg: The Dai Savings Rate (DSR)
DAI’s peg is stabilized via algorithmic interest rates:
- DAI > $1: Lower DSR to reduce demand.
- DAI < $1: Raise DSR to incentivize holding.
This mimics central bank monetary policies, adjusting supply/demand dynamically.
4. Why DAI Holds Value
- Safe Haven: Hedge against Bitcoin/crypto volatility by converting holdings to DAI during downturns.
- Low-Cost Transactions: Cheaper and faster than traditional remittances.
- 24/7 Accessibility: Trade or transfer value without banking hours restrictions.
👉 Discover how DAI compares to other stablecoins
FAQ
Q: Is DAI really decentralized?
A: Yes. Its smart contracts operate autonomously, though MKR token holders govern parameters like collateral types and fees.
Q: What happens if ETH crashes below the collateral ratio?
A: The system liquidates CDPs to protect DAI’s peg, with MKR absorbing residual losses if needed.
Q: Can I earn interest on DAI?
A: Yes! The DSR (currently ~1-4%) rewards holders for staking DAI in approved wallets/protocols.
👉 Learn more about DAI’s use cases
DAI merges crypto’s decentralization with fiat stability—a cornerstone of DeFi’s evolving economy.