Dai (or DAI, formerly Sai or SAI) is a

stablecoin Stablecoins are cryptocurrencies where the price is supposed to be pegged to a reference asset, which is either fiat money, exchange-traded commodities (such as precious metals or industrial metals), or another cryptocurrency. In theory, the p ...

on the

Ethereum Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether (Abbreviation: ETH; sign: Ξ) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capita ...

blockchain A blockchain is a type of distributed ledger technology (DLT) that consists of growing lists of records, called ''blocks'', that are securely linked together using cryptography. Each block contains a cryptographic hash of the previous block, a ...

whose value is kept as close to one

United States dollar The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the officia ...

(USD) as possible through a system of

smart contract A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. The objectives of smart contracts are the re ...

s and the decentralized participants those contracts incentivize to perform maintenance and

governance Governance is the process of interactions through the laws, social norm, norms, power (social and political), power or language of an organized society over a social system (family, tribe, formal organization, formal or informal organization, a ...

functions. Dai is maintained and regulated by MakerDAO, a decentralized autonomous organization (DAO) composed of the owners of its governance token, MKR, who may propose and vote on changes to certain

parameter A parameter (), generally, is any characteristic that can help in defining or classifying a particular system (meaning an event, project, object, situation, etc.). That is, a parameter is an element of a system that is useful, or critical, when ...

s in its smart contracts in order to ensure the stability of Dai. Together, Dai and MakerDAO are considered the first example of

decentralized finance Decentralized finance (often stylized as DeFi) offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts on a blockchain. DeFi platforms allow people to lend or borrow funds f ...

to receive significant adoption.

Overview

Dai is created from an overcollateralized loan and repayment process facilitated by MakerDAO's smart contracts in the form of a

decentralized application A decentralised application (DApp, dApp, Dapp, or dapp) is an application that can operate autonomously, typically through the use of smart contracts, that run on a decentralized computing, blockchain or other distributed ledger system. Like ...

. Users who deposit

Ether In organic chemistry, ethers are a class of compounds that contain an ether group—an oxygen atom connected to two alkyl or aryl groups. They have the general formula , where R and R′ represent the alkyl or aryl groups. Ethers can again be c ...

(or other cryptocurrencies accepted as

collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...

) are able to borrow against the value of their deposits and receive newly generated Dai. The minimum collateralization ratio for

is currently set at 150%, which means a depositor of $150 worth of Ether may borrow up to 100 Dai (worth roughly $100). If the collateralization ratio of a loan falls below the minimum ratio, anyone may call a function on the contract to

liquidate Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign coun ...

the loan and receive a percentage of the collateral as a reward. Upon repayment of the loan and its accrued

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...

, the returned Dai is automatically destroyed, and the collateral is made available for withdrawal. In this way the USD value of Dai can be said to be backed by the USD value of the underlying collateral held by MakerDAO's smart contracts. By controlling the types of accepted collateral, minimum collateralization ratios, and the

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

s for borrowing or storing Dai, MakerDAO is able to control the amount of Dai in circulation, and thus its value. The power to propose and implement changes to such variables is granted, through code, to holders of the MKR token. Owners of the governance token are able to vote on proposed modifications in equal proportion to the amount of tokens they hold. The MKR token also serves as an

investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

in the MakerDAO system. Added interest that borrowers pay back, on top of their loan's principal, is used to buy up MKR tokens from the market and burn them, taking them permanently out of circulation. This mechanism aims to make MKR

deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation ...

ary in correlation to the revenues from lending Dai.

History

MakerDAO was formed in 2014 by Danish entrepreneur Rune Christensen. On December 18, 2017, Dai and its associated

smart contracts A smart contract is a computer program or a transaction protocol that is intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. The objectives of smart contracts are the re ...

were officially launched on the main

network.} The price of Dai was successfully kept close to one

US dollar The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...

during its first year of existence, even though the price of

, the only

available at the time, declined by more than 80% during the same time period. In September 2018, venture capital firm

Andreessen Horowitz Andreessen Horowitz (also called a16z, legal name AH Capital Management, LLC) is a private American venture capital firm, founded in 2009 by Marc Andreessen and Ben Horowitz. The company is headquartered in Menlo Park, California. Andreessen ...

invested $15 million in MakerDAO by purchasing 6% of all MKR tokens. In 2018, MakerDAO formed the Maker Foundation, run from

Copenhagen Copenhagen ( or .; da, København ) is the capital and most populous city of Denmark, with a proper population of around 815.000 in the last quarter of 2022; and some 1.370,000 in the urban area; and the wider Copenhagen metropolitan ar ...

, which serves to help bootstrap the ecosystem by, for example, writing code needed for the platform to function and adapt. In 2019, MakerDAO experienced internal struggle over whether it should integrate more with the traditional financial system. Christensen wanted greater regulatory compliance to allow for assets besides cryptocurrency to serve as collateral for Dai. The struggle led to the departure of MakerDAO's CTO. In March 2020, as a result of extraordinary market volatility at the onset of the

COVID-19 pandemic The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identif ...

, Dai experienced a

ary

deleveraging At the micro-economic level, deleveraging refers to the reduction of the leverage ratio, or the percentage of debt in the balance sheet of a single economic entity, such as a household or a firm. It is the opposite of leveraging, which is the prac ...

spiral that, at its peak, caused it to trade for up to

USD The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...

$1.11 before returning to its intended $1.00 valuation.

Name

According to Rune Christensen, the name of the cryptocurrency is based on the Chinese character 貸, which he translated as "to lend or to provide capital for a loan".

Notes

References

External links