Cryptocurrencies have developed over the years from being the simple digital currency used for exchanging things and services to a specialized form of exchange. Developers and organizations of digital currencies that issue cryptocurrency are continuously finding more ways to implement blockchains to provide new tech products to the market. In this article, we can learn about What Is DAI Coin? Why Is It So Famous and Special?
Stablecoins are a new form of cryptocurrency that has been coined to fulfill the role of a value exchange token. As the term suggests, their goal is to remain at a stable value with a fiat currency while helping the exchange of other cryptocurrencies. Many stablecoins are popular with a currency like USD, usually in a 1:2 ratio.
Stablecoins provide a strong way to exchange liquidity without needing to use physical funds locked in regular bank accounts. Crypto coins that work like real money USD, ETH, Bitcoin for example.
What is DAI?
DAI is a numerical stablecoin managed by “MakerDAO”. MakerDAO is a (decentralized autonomous organization) DAO, a company that works like a blockchain-based financial institution but is managed as a computer program administered by the holders of the token currency native to the blockchain.
The DAI cryptocurrency was established on 18 December 2017, on the Ethereum blockchain to maintain its proximity to USD. DAI is named after a Chinese letter, which the “MakerDAO” founder “Rune Christensen” DAI translated as “provide capital for a loan.”
DAI’s founder contract is written in Solidity, a generally used developer language for Ethereum-based programs. Through this contract, DAI uses a system of smart contracts to maintain its unity with the USD.
How Does the DAI Coin Work?
At its basis, DAI is an ERC-20 token that can be purchased through centralized and decentralized crypto exchanges.
It’s important to mention that the DAI-USD peg is soft, this means the value varies to an extent, but the DAI value remains close to the USD market value. The DAO uses numerals in the DAI blockchain that are designed to automatically adjust the value of the money to keep the 1:2 peg with USD. This is done by:
- Managing the supply of DAI coins in the market,
- Managing the interest rate in the DAO smart contracts
- The regulation of assets used as collateral for developing DAI
There are different methods through which the DAO can control these parameters. The following are the main ones discussed next.
Vault and Keeper Accounts
Investors of DAI can open a maker vault account on this app and create DAI coins vs Ether (ETH) or other cryptocurrencies. These DAI coins function as debt adjustment option contracts and are exchanged after a set period.
The value of Ethereum (ETH) used will always better the value of DAI issued to you also called overcollaterization. If the value of your ETH (Ethereum) deposit falls down the value of the DAI issued, your ETH deposit will be decreased.
To assure that undercollateralized accounts have enough cryptocurrency funds to accept liquidation, the founder offers keeper accounts. Keepers are so special user accounts that pale their cryptocurrency holdings to bring liquidity to pay off the collateral of vault accounts that lose their value over time. Therefore, keeper accounts to keep a steady supply of DAI in spread to match the USD value.
If an investor who has rented DAI against collateral repays it along with any accrued interest, then the DAI coins are broken, and the collateral deposit in the account is available for withdrawal.
DAI Savings Rate
Investors who hold DAI can extend it to other investors and earn interest by depositing it into DSR smart contracts, which are depending on the DAI savings rate and an effective interest rate.
If demand for DAI is increase, the DAI savings rate can be increased to boost contract investors to hold their DAI deposits. A decrease in DAI currency supply can result in a decrease in the DAI saving rate.
A stability fee is the best way to manage the price of DAI. A stability fee is charged when generating DAI coins. A low stability fee can motivate maker account holders to create more DAI and increase its supply, and vice versa.
Advantages of DAI
Investors in Low-income countries that require to keep USD holdings but have no way to keep safe USD deposits can use DAI to store and save USD-equal currency. People from countries with unstable currencies benefit highly from DAI holdings.
DAI also offers investors the advantage of using secure cryptocurrency wallets for deposits, providing that the funds are safe from theft. However, we advise investors to take the necessary precautions to keep their crypto wallets. And associated accounts protect from unauthorized access.
Low Barriers to Entry
DAI cryptocurrency is available in many countries and many crypto exchanges. DAI does not need a minimum account balance. For this reason, DAI cryptocurrency is an attractive option for anyone with a low amount of funds or investors who want to start with small cryptocurrency investments.
Bypassing Withdrawal Limits
Many low-income countries’ governments have required daily withdrawal limits on funds in regular bank accounts. People in low-income countries can only withdraw a limited amount of currency. Through DAI, DAI investors/users can withdraw additional funds over these limits.
DAI stock can earn account holders some extra funds through interest payments. This fund is set by the annual savings rate and is a bonus for investors having extra funds to invest in maker accounts.
What Makes DAI Special?
There are many stablecoins in the market, some with special backing, but there are three processes that make DAI special.
Unlike other stablecoins, which are generally backed by an inventory of fiat currency. Controlled by an investment company, DAI is managed/controlled by a DAO.
Various stablecoins are assisted by fiat currency. DAI, on the other hand, is assisted by different cryptocurrency holdings (for example, ETH, BAT, and WBTC) based on the assets of MKR stakeholders. This decreases the risk for token holders, while also developing the stability of DAI.
DAI investors can earn their cryptocurrency through smart contracts system. This is a good reason for investors who buy DAI and MakerDAO backers. Both types of investors have a means of creating passive income from their DAI holdings. With the original backers acting as sponsors for the lending contracts.