Dai (DAI) is a decentralized stablecoin on the Ethereum blockchain, designed to maintain a 1:1 peg with the US dollar. Unlike traditional stablecoins backed by centralized dollar reserves, Dai achieves stability through collateralized crypto assets. It is generated by the Maker Protocol, managed by MakerDAO, a decentralized autonomous organization (DAO) governed by MKR token holders. Launched in 2017 by Danish entrepreneur Rune Christensen, Dai offers a low-volatility digital asset for individuals and businesses.

How Does Dai Work?

Dai’s stability relies on a Collateralized Debt Position (CDP) mechanism. Users lock Ethereum (ETH) or other supported ERC-20 tokens in smart contracts as collateral to generate Dai. For example, depositing $200 worth of ETH might allow the creation of 100 Dai, with over-collateralization (typically 150% or higher) ensuring value stability. If collateral value drops, the system automatically liquidates part of it to maintain the peg. Repaying Dai burns it, releasing the collateral. Dai’s supply adjusts dynamically based on market demand, with no fixed cap.

Advantages and Limitations of Dai

Dai’s strengths include decentralization and stability. Free from single-entity control, it offers transparency and trust, making it popular in decentralized finance (DeFi) for lending and payments. As a stablecoin, Dai shields users from crypto market volatility, enabling risk reduction during downturns. However, over-collateralization reduces capital efficiency, and rapid collateral price drops can trigger liquidations, risking losses.