DAI is a stablecoin issued by MakerDAO, a protocol built on Ethereum, that aims to maintain a one-to-one value with the US dollar. It enables the lending and borrowing of cryptocurrency assets directly and without intermediaries. ^[8]

Overview

Unlike stablecoins like USDT which are backed by a centralized organization managing fiat assets, DAI has no central controlling entity. ^[9]

To obtain DAI, users can either buy the equivalent dollar amount of DAI using ETH on an exchange or use the Maker Protocol to collateralize ETH and other assets to generate DAI. The issuance of DAI is facilitated by a smart contract that accepts Ethereum-based assets as collateral, used to maintain its one-to-one value with the US dollar. ^[9]

The founder of MakerDAO, Rune Christensen, outlined plans to introduce a new stablecoin and governance token as part of an ongoing overhaul of the platform. This proposal was posted on Maker's governance forum in May 2023. ^[13]

These new tokens will represent upgraded versions of Maker's existing stablecoin, DAI, and its governance token, MKR. They are anticipated to be launched "within several months," alongside the introduction of a new, unified brand and website for the protocol, as indicated in the proposal. ^[13]

In addition to these token upgrades, Christensen has also proposed the incorporation of artificial intelligence into Maker's governance processes. ^[13]

Collateralized Debt Positions

DAI is a decentralized stablecoin that maintains a one-to-one ratio with the U.S. dollar and uses various cryptocurrencies, including ETH, BAT, USDC, wBTC, COMP, and more, as collateral. The Maker Protocol, an Ethereum-based protocol, allows users to generate DAI by depositing collateral assets into Collateralized Debt Positions (CDPs), which act as secure storage. To mitigate the volatility of the crypto collateral, DAI is often over-collateralized, requiring a deposit greater than the value of the generated DAI. To recover the deposited collateral, the user must return the DAI and pay a stability fee. The MakerDAO community votes on the addition of new collateral options. ^[8][9]

DAI Savings Rate

The MakerDAO system was updated in November 2019, introducing the Dai Savings Rate, an interest rate paid on all Dai deposited in a specific smart contract that is decided by a MakerDAO vote. DAI token holders receive interest on their DAI. The Dai Savings Rate is set by MKR token holders, MakerDAO's native governance token. These MKR holders act as guarantors for DAI and are incentivized to maintain the system's stability by the potential liquidation of their MKR in case of a system crash. ^[10]

Maker Vaults

Maker Vaults are smart contracts that allow users to leverage accepted collateral assets and generate Dai in the Maker Protocol. Users can access the Maker Protocol and create Vaults through various user interfaces, including Oasis Borrow and interfaces developed by the community. Generating Dai through a vault creates an obligation to repay the borrowed amount along with a Stability Fee, in order to withdraw the locked collateral. ^[12]

In order to maintain sufficient collateral in the Maker Protocol to cover the value of all outstanding debt, any Maker Vault that is deemed too risky based on the parameters set by Maker Governance is liquidated through automated Maker Protocol auctions. The determination is made by comparing the Liquidation Ratio to the current collateral-to-debt ratio of a Vault. Each type of Vault has its own Liquidation Ratio, which is established by MKR voters and based on the risk profile of the specific collateral asset type. ^[12]

Through its auction mechanisms, the Maker Protocol can liquidate Vaults even if price information for the collateral is not available. When a Vault is liquidated, the Maker Protocol takes the collateral and sells it using an internal market-based auction mechanism known as a Collateral Auction. The proceeds from the Collateral Auction are used to cover the outstanding obligations of the Vault, including the Liquidation Penalty fee determined by MKR voters for the particular type of collateral used in the Vault. ^[12]

Dai Foundation

The Dai Foundation, located in Denmark, operates autonomously and is separate from the Maker Foundation. It was established to preserve the Maker community's intangible assets, such as trademarks and code copyrights, and adheres to strict and defined objectives outlined in its mandate. The Foundation's role, as stated in the Dai Foundation Trust Deed, is to protect the elements of the Maker Protocol that cannot be technologically decentralized. ^[11]