Everything You Need to Know About DAI Coin
DAI coin is the first Ethereum-based, collateral-backed cryptocurrency meant to have a one-to-one exchange rate with the US dollar. Maker DAO creates and governs it. In terms of market capitalization, it is one of the largest stablecoins.
What is a Stable Coin?
A stablecoin is a digital money with a flat currency value. Typically, these coins are backed by entities that hold an equal quantity of fiat currency as security. For example, if a company is creating 10,000 stablecoins tied to the US dollar, it must keep 10,000 US dollars in deposit as security. Other assets equal to the value of the fiat currency to which the stablecoin is pegged are also held by some organizations.
Fiat-backed stablecoins
Supported by fiat currencies like the USD, GBP, and EUR. A stablecoin’s value equals the fiat currency to which it is linked.
Commodity-Backed stablecoin
Some companies invest in gold rather than flat currencies. In this situation, the stablecoin’s value is equivalent to one unit of that commodity (i.e., one ounce of gold).
Non-collateralized stablecoins
Smart contracts keep the value of non-collateralized stablecoins stable. To determine the value of the stablecoin, the smart contract maintains a balance between supply and demand.
Crypto-backed stablecoins
Crypto-backed stablecoins, unlike regular stablecoins, have a 1:2 ratio rather than a 1:1 ratio. As collateral, these coins leverage well-known cryptocurrencies such as Bitcoin and Ethereum. DAI is a prominent crypto-backed stablecoin created on the Ethereum Network. It is tied to the US dollar.
What is DAI Coin?
DAI is an Ethereum-based stablecoin that is tied to the US dollar. DAI coin is built on open-source software that enables cryptocurrency holders to borrow and lend money by securing their crypto assets. Several cryptocurrencies collateralize the DAI coin, and its value is indirectly fixed to the US dollar.
DAi is critical in absorbing the volatility of cryptocurrencies, especially when there is a chance of a crash. The lending method for DAI tokens is identical to that of traditional collateralized loans. Users can obtain DAI tokens by entrusting their ETH or other crypto assets to a smart contract.
If the contract’s terms and conditions are not followed, the lender can sell these assets through an internal market-based auction mechanism. Similarly, borrowers can recover their crypto assets by returning the DAI tokens whenever desired. They must pay a fee to regain their assets.
How Does DAI Work?
DAI keeps its value using the Target Rate Feedback Mechanism (TRFM). When the price of DAI falls below $1, the TRFM rises. Investors begin to invest in the coin to profit from the price drop. As a result of increased demand, the DAI token’s price returns to $1.
As previously stated, cryptocurrency holders can obtain DAI tokens by locking their crypto assets. To manage the volatility of cryptocurrencies, DAI is typically over-collateralized. For example, if a user requires 100 DAI tokens, he must deposit $200 in ETH into the smart contract.
DAI can safely secure a loan even if the price of ETH decreases by 20-25%. Borrowers must pay a stability fee to regain the locked cryptocurrency.
What is DAI Token Used For
DAI is one of the most valuable stablecoins, with a market cap of $6.7 billion. There are presently 6.7 billion DAI tokens in circulation. It does not have a maximum supply because users can acquire as many DAI tokens as they like by locking their crypto assets.
Hedging
DAI absorbs the volatility of cryptocurrencies by keeping its value constant at $1 in any situation.
Exchange with fiat
DAI is a popular asset in the world of Decentralized Finance, and you can exchange it for fiat currency. Users can exchange it for fiat money or use it to purchase products.
Passive income
This service is available in the following countries: the United Kingdom, Australia, France, the United States, Spain, and the Netherlands.
Why is DAI a Better Stablecoin?
The most common stablecoins in the cryptocurrency world are USCD and USDT. Since physical assets back them, these coins have effectively maintained their worth over time. These tokens, however, are managed by centralized authorities.
As a result, users cannot truly attain decentralization by using these tokens. On the other hand, DAI is a decentralized solution administered by smart contracts. Nobody can mess with Dai coins or addresses.
Why is DAI Popular in Defi?
Since DAI is a decentralized coin, it allows smart contracts to interact. According to a survey, almost 400 apps feature DAI integration. Using this protocol, users can trade data between multiple Ethereum-based services.
How to Get DAI Tokens?
MakerDAO allows users to generate DAI tokens directly. When they apply for the loan, the users receive the loan in the form of DAI tokens. DAI tokens are destroyed after the loan is repaid. You can also purchase DAI tokens via several exchanges.
Conclusion
In terms of market cap, DAI is one of the most popular stablecoins. It is backed by crypto assets, unlike other stablecoins. To receive DAI tokens from MakerDAO, customers must lock their crypto assets. We’ve discussed how the DAI token differs from other stablecoins and how its value is kept stable. Please contact us if you want additional details regarding the DAI coin and how does it works.