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A brief history of DAI
Stablecoin DAI is an ERC20 token issued at the end of 2017 by the MakerDAO platform. It is the first decentralized token on the Ethereum blockchain. Almost always, the market rate of 1 DAI is equal to 1 US dollar. Mining and staking are not available for this project, new tokens are issued by the users of the MakerDAO platform.
The developers called the control of volatility and the achievement of reliability as the main goals of the project. The stable value of DAI is supported by smart contracts and game theory. To increase the level of user confidence, a conversion strategy based on collateral technology and CDPs is used.
CDP (Collaterized Debt Position) is a smart contract that blocks ETH collateral and issues DAI tokens. The amount of the collateral always exceeds the amount of issued tokens, the minimum collateral ratio should be 150%. For example, if the cost of 1 ETH is $100, you can generate up to 66 DAI.
Features of DAI
- Unlike other stablecoins, the DAI token is backed not by fiat currencies, but by cryptocurrency. CDPs ensure that the creation of DAI tokens without ETH backing is not possible.
- Since DAI is decentralized, the owners cannot block it on the address.
- The DAI token is issued according to the following principle. The user deposits ETH coins into the platform account and converts them first into WETH (ETH ERC20 token), and then into the PETH platform utility token. After that, the amount of the collateral is paid for the smart contract for the issue of the DAI token.
- To unlock the amount of the collateral, the user needs to return the DAI tokens. For the use of the loan, interest is accrued in the MKR token, which gives them the right to vote when making changes to the main parameters of the functioning and security of the platform.
- Token volatility is controlled by smart contracts. If the DAI price goes below $1, interest rates go up, which encourages users to close the CDP and pay off the debt. The total DAI supply decreases as tokens are burned. If the DAI price exceeds $1, interest rates go down, which encourages users to open CDPs. As a result, new DAI tokens are created and the total supply increases.
Disadvantages of DAI
- The complexity of the mechanism of the Maker exchange and the creation of the DAI token. The user should study the details of creating collateral positions and generating a token, as well as their return, before opening their first CDP.
- Strong competition in the stablecoin market. There are currently over 200 stablecoins in existence. You can read more about them in our article Features and disadvantages of stablecoins.