Skip to content

DeFi and DAI

Defi and DAI – DAI is a decentralized stablecoin, meaning 1 DAI is pegged to 1 US Dollar. It was created by Maker, a sector leading cryptocurrency lending protocol.

Maker was founded in 2015, making it one of the very first DeFi projects. The company is backed by prominent entities such as Andreessen HorowitzPolychain Capital and Vitalik Buterin, one of the inventors and founders of  Ethereum.

Maker’s role in the larger DeFi ecosystem has lead to Dai serving as the defacto stablecoin for most applications while the Dai Savings Rate – a passive interest-earning opportunity on Dai – is largely seen as the sector’s Risk-Free Rate.

Why DAI?

There are many reasons why Dai has taken lead in the wider DeFi landscape. Here are a few of them:

  • Stability – As a stablecoin, Dai aides in the volatility of cryptocurrencies while maintaining the essential features of accessibility, censorship resistance, and distributed governance.
  • Collateralization – Unlike other stablecoins, Dai is backed by popular cryptocurrencies such as Ether ($ETH) rather than by an equivalent amount of fiat dollars.
  • Trustless – Dai aims to be as trustless as possible, meaning there should be limited reliance on a third party to custody collateral like how US Dollar Coin (USDC) relies on Circle to custody the US Dollars backing the supply.
  • Non-custodial – With Dai, all cryptocurrencies backing the supply are stored through audited smart contracts rather than by a third party like Circle.
  • Accessibility – Dai can be acquired by opening a Vault using Oasis Borrow (explained more in the how Dai works section) or on exchanges like BinanceCoinbase and Uniswap.
  • Composability – Dai can be loaned or borrowed on a wide range of DeFi products like OasisCompound or dYdX to earn passive income. Similarly, we’ve seen dozens of Dai token flavors emerge for Dai to be used in new and unique ways.

Defi and DAI and MakerDao

defi-beeders (14)

Decentralized finance (DeFi) is an umbrella term that could refer to a lot of cryptocurrency. After all, holding ETH instead of a fiat-backed currency is a way of altering one’s financial portfolio with a decentralized asset. But DeFi as we know it tends to refer to systems and tools that let people use banking and investment products like lending and borrowing without relying on a bank or other centralized financial institution.

To do this, many decentralized or cryptocurrency-based financial products rely on stablecoins to give end-users another tool for holding currency at a more stable exchange rate. A stablecoin is a digital crypto-asset that stays equal in value to another asset. Most examples are of a coin that stays equal to $1.00 USD, but they can be pegged to other currencies too like Euro, RMB, or other crypto assets like BTC or ETH.

One interesting and decentralized stablecoin is DAI (pronounced “DYE”). DAI is maintained by a process from MakerDAO and it is secured on the Ethereum network. MakerDAO‘s system keeps 1 DAI close to $1 by collateralizing DAI with ETH and MKR. ETH and MKR are bought, sold, or deposited for DAI to create a supply and demand loop that buys DAI when the price is low, or sells DAI when the price is high. Buying low raises the price, selling high lowers the price. MakerDAO’s system enables MKR holders to participate and ensure that there is collateral for DAI to stay close to $1.

Having 1 DAI = $1 is an amazing tool for crypto finance. It keeps a stable record of value, profit, and loss. It opens up opportunities for differentiated products and clear value. For example, putting ETH into an interest-bearing account is possible, but the volatility in ETH and other non-stable assets make the return on that investment difficult to track. It’s not impossible, but it’s far more complicated, especially to non-crypto natives.

DAI and stablecoins let people access a common framework for value. We all know 1 bitcoin = 1 bitcoin, but most of the world still sees crypto as a speculative venture tied to the value of fiat currencies. Giving people tools to work within this framework opens up more developers and user to decentralized systems.

At Status we love decentralized finance tools that neatly pair with our Messenger Wallet. Holding DAI in your wallet on mobile is simple, and you can send and receive DAI or other crypto right in chat. It’s like a Venmo or Cash App for crypto with incredible messaging privacy features built in.