Multi-Collateral Dai

As the decentralized finance (DeFi) ecosystem continues to grow, more crypto projects spring up with diverse use cases. These projects are crucial in the crypto space because they develop decentralized exchanges (DEXs), borrowing and lending protocols, and other features to boost accessibility for traders, investors and developers. 

However, not many cryptocurrencies shield investors from the prevalent crypto market volatility. Dai (DAI) steps in as a stablecoin that strives to maintain the same value as the US dollar, offering investors a relatively safe way to hedge against price swings. So, what is DAI, and what should investors know before investing in the asset? Keep reading to find out.

Dai Price

Dai (DAI) is the token that powers the Maker Decentralized Autonomous Organization (MakerDAO), which supports DeFi borrowing and saving. Let’s dive into the coin’s price analysis before answering the question, ‘what are Dai coins?’

As of March 2024, Dai is trading at about $1 per token, up about 0.01% compared to the February 2024 Dai price. The month-on-month (MoM) price change shows that Dai coin isn’t the type of cryptocurrency that experiences drastic price changes. 

However, despite being a stablecoin, Dai’s price isn’t fixed at $1. The coin has experienced minor volatility over time, resulting in its relatively consistent value. So, as Bitcoin has peaked to reach new all-time highs and Ethereum has rallied in Q1 2024, Dai’s value remains pegged to around $1. 

Further analysis of the coin’s price since its inception shows its relative stability amid the highs and lows of the broader crypto market:

• 2017: MakerDAO was created in 2014, but the DAO launched the DAI token on the Ethereum network in 2017. The coin’s value was close to $1 between 2017 and 2018.  
• 2018: Ether was the only asset pegged to DAI in 2018, and despite the coin losing about 80% of its value at the time, DAI remained relatively stable at around $1. 
• 2019: DAI continued to move sideways to maintain a value of around $1 for most of the year. 
• 2020: Dai’s value dropped to an all-time low price of $0.96 in February 2020, but it was not long before the coin returned to just over $1. It ultimately reached $1.049 in April 2020.
• 2021: The Dai price was sustained at around $1 throughout 2021, despite the token reaching $1.01 in December. 
• 2022: Dai hovered around $0.99 to $1 from January to December 2022. 
• 2023: Dai maintained its stable price movements from the previous year, trading between $0.99 to $1.0004.

In 2024, Dai maintained the usual trend. As of March 2024, the coin is valued at around $1. According to the market data at the time, it has only grown by about 0.05% compared to its March 2023 price and by approximately 0.30% since it began trading in 2017.

Factors affecting Dai’s price

Although Dai crypto is a stablecoin with a relatively consistent value compared to most cryptocurrencies, it also experiences price volatility. However, unlike most cryptocurrencies, whose values are primarily impacted by bullish or bearish market sentiments, DAI’s price changes result from external factors. 

First, Dai is an algorithmic stablecoin partially backed by volatile crypto assets, including Ether (ETH), Basic Attention Token (BAT) and Wrapped Bitcoin (WBTC). Unlike fiat-backed stablecoins such as Tether (USDT) and USD Coin (USDC), Dai’s value is partially determined by market forces and the strength of its connected assets. 

Furthermore, Dai’s price can increase or be depegged from the $1 price when its demand drops and supply increases. Moreover, regulatory challenges, such as legal cases, investigations by the authorities and similar issues, can impact Dai’s value.

What is Dai?

Dai is a pioneer Ethereum-based stablecoin or collateral-backed cryptocurrency. The token was created by MakerDAO, a DAO ecosystem of smart contracts on the Ethereum blockchain. 

The DAI token is designed to have a 1:1 value with the US dollar and is one of the most prominent stablecoins in the cryptocurrency space. The Dai ecosystem is permissionless, allowing users to borrow and lend funds using other cryptocurrencies such as ETH, COMP and BAT as collateral instead of being backed by a fiat reserve. 

So, unlike other stablecoins such as USDT and USDC, which are controlled by a central authority, DAI is MakerDAO’s Maker Protocol’s native cryptocurrency. The ERC-20 token is available on various centralized exchanges (CEXs) and decentralized exchanges (DEXs). Dai holders can also lend their tokens on the Maker Protocol or exchanges for passive income, and the annual percentage yield (APY) varies from one exchange to another. 

Overall, investors use DAI as a relatively stable store of value, a means of payment for day-to-day digital transactions, and a viable passive income channel, which expands the token’s utility and value to users.

How does Dai work?

Besides being traded on diverse cryptocurrency exchanges, Dai offers numerous DeFi features, including lending and borrowing. 

Collateralized debt positions 

Dai uses a unique smart contract model called Collateralized Debt Positions (CDPs) on the Maker Protocol. Using CDPs, Dai holders can lock up a collateral asset such as ETH or WBTC and receive Dai tokens as a loan. 

CDPs are similar to escrows or vaults for storing users’ collateral until they repay the borrowed Dai tokens. Usually, the collateral’s value is higher than the value of Dai to be borrowed due to potential losses to volatility. For instance, you may need to lock up $200 worth of BAT to access a loan of 100 DAI tokens. 

If the collateral’s value goes below the worth of the issued DAI tokens, the collateral will be liquidated, and you must pay a stability fee to unlock it. 

Target rate feedback mechanism (TRFM)

Dai uses the TRFM mechanism to maintain its value. The coin’s TRFM increases when Dai’s price falls below $1, encouraging investors to take advantage of the potential arbitrage opportunity and raise Dai’s value to $1 due to increased demand. 

No account minimum

Another exciting aspect of Dai is its elimination of account minimums. The token’s protocol is open to both beginner and seasoned traders with all budget sizes, as they don’t need to own the DAI tokens they want to borrow. 

Who created Dai?

Danish entrepreneur Rune Christensen created MakerDAO (the company behind Maker Protocol and Dai crypto) in 2014. However, he didn’t launch DAI until December 2017, when the coin went live on the Ethereum network. 

Rune built the Maker Protocol as an open-source, decentralized project to address the concerns of centralized stablecoin protocols of the time. Because DAI is permissionless, it offers users unlimited access to funds. Unlike competitors such as USDT and USDC, which must comply with traditional finance regulations, including daily and weekly withdrawal caps, DAI holders can access their funds at any time. 

Dai market performance

As of March 2024, Dai is trading at around $1 per token, with a market cap of over $5bn. Dai’s high market cap value places it among the top-ranked cryptocurrencies by market cap, sitting at number 24 as of late March 2024. 

Comparatively, DAI ranks significantly lower than major competitors such as USDT and USDC in terms of market cap. As of March 2024, Tether’s market cap is over $100bn, while USD Coin’s market cap stands at over $30bn. Both stablecoins are pegged to the USD and are ranked third and seventh among the top cryptocurrencies by market cap during the period. 

Nonetheless, Dai is a premier stablecoin in the Ethereum blockchain, which is evident in its significant market cap and support for diverse DeFi services, including trading, lending and borrowing. 

How Is Dai Created?

As a crypto-collateralized stablecoin, Dai is collateralized with Ether. Any Ether holder can create Dai using MakerDAO DApp.

First, you have to send your Ether to a collateralized debt position (CDP). In turn, you would receive a portion of Dai. A CDP is a smart contract which runs on the blockchain and governs the issuance and redemption of Dai. After you receive Dai for your ETH, the only way to get your Ether back is to repay the borrowed DAI. A simplified step-by-step Dai issuance process could look something like this:

1. A user deposits ETH (let’s say it’s worth $200).
2. He or she issues 100 DAI worth $100 with a collateralization ratio 2:1.
3. The user withdraws DAI and uses it as he or she pleases.
4. When the user wants to switch DAI back to ETH, he or she must repurchase it with the same 100 DAI + interest. As of January 2019, the Dai annual interest rate is 1%.
5. The user pays back the DAI plus accrued interest. The interest fees go directly to MKR token holders for maintaining the system.

As you can see, fundamentally Dai is a loan taken against Ethereum. With MakerDAO, ETH users can request for Dai loans against their Ether holdings. The process begins with turning user’s ETH holdings to the ERC-20 token called WETH (Wrapped Ethereum). Upon doing so, WETH joins the pool of Ethereum, which is used as collateral for all issued DAI tokens. The pool is called PETH (Pooled ETH). Next, PETH is locked to create a Collateralized Debt Position (CDP), and users receive Dai tokens which they are free to use.

The CPD debt ratio tends to increase when Dai is created until it reaches a limit and no more Dai can be withdrawn against the CPD.

Of course, this is a simplified explanation of the mechanisms behind DAI. The good news that 99% of DAI users don’t have to go through all the complexities of issuing DAI and just buy it on the exchange.

How to buy and store Dai 

Investors can buy DAI or trade the asset on various centralized and decentralized exchanges. Notable centralized exchanges supporting DAI include Binance, Coinbase and Kraken. You can also trade the asset on DEXs such as Uniswap and Curve by following the steps below:

• Step 1: Choose a reputable crypto exchange and create a new trading account. 
• Step 2: Complete identity verification (KYC) if required. 
• Step 3: Deposit funds using the supported payment methods. 
• Step 4: Search for DAI in the platform’s markets and buy the desired quantity. 
• Step 5: Transfer the DAI tokens to an external crypto wallet. 

Storing your DAI stablecoin outside an exchange wallet is a great security measure to hedge against potential losses due to exchange hacks. You can transfer the Dai coin to a hot/software Ethereum-compatible wallet such as MetaMask or opt for cold/hardware wallets such as Ledger and Trezor for personal asset custody. Choosing the right option depends on your preferences. So, do your research and select the option that best suits your needs.  

Risks and challenges 

Although DAI offers better stability than most cryptocurrencies outside the stablecoin category, it has unique risks that investors should know about. First, the token issuer, MakerDAO, may face regulatory challenges, become bankrupt, or encounter operational issues that may result in the coin depegging from the $1 mark. 

Also, counterparty issues may arise if Dai’s collateral assets become insolvent or face security issues resulting in losses for investors. Similarly, the platform can liquidate investors’ collateral if its value falls below the disbursed Dai’s worth, resulting in additional fees to unlock the cryptocurrency serving as collateral. 

September 2023 research from S&P Global shows that Dai and USDC are more prone to depegging from the US dollar. Both coins spent more time below the $1 mark between 2021 and 2023. DAI was below the dollar for 20 minutes during the period, compared to USDT’s one minute. 

Finally, DAI is an algorithmic stablecoin susceptible to technical challenges, including system bugs, network failure or complete algorithmic shutdown.

Regulatory and legal aspects of Dai 

Regulation remains a major consideration for crypto investors and enthusiasts. Although Dai is a stablecoin serving as a means of exchange, it is not considered a legal tender due to its status as a cryptocurrency. Moreover, there’s no unified regulation of stablecoins, so investors need clarity to determine whether Dai and other tokens in its asset class are considered as real-money equivalents. 

A global stablecoin regulation that is flexible, consistent, comprehensive, and focuses on the coins’ structure and use cases would positively impact the stablecoin ecosystem, causing increased interest and demand from investors. 

However, stringent regulatory frameworks in the broader crypto market could negatively rub off on Dai and other stablecoins.  

Comparing Dai to other cryptocurrencies 

Dai is a major player in the stablecoin market, providing similar use cases as competitors such as USDT, USDC and BUSD. Below, we compare the assets to see how DAI ranks. 

Dai vs USDT 

MakerDAO’s Dai and Tether’s USDT are stablecoins whose values are pegged to the US dollar. However, Dai is decentralized and maintains its value using other cryptocurrencies as collateral, while USDT is centralized and backed by Tether’s fiat USD reserves. 

Although both coins are valued at around $1, USDT has a larger market cap. As of March 2024, USDT’s market cap is over $100bn, compared to Dai’s over $5bn.

Dai vs USDC

Circle’s USDC and MakerDAO’s Dai hold a value of around $1 and aim to create stability. However, Dai is a decentralized and collateral-backed asset soft-pegged to the USD, while USDC is a centralized and physical USD-backed stablecoin. As a result, DAI is more transparent because anyone can audit it. However, as of March 2024, USDC has a larger market cap of over $30bn, compared to Dai’s more than $5bn.  

Dai vs BUSD 

Binance USD (BUSD) and Dai have a long history as competitors. While the former is backed by the physical USD reserves of the Binance exchange, the latter is decentralized and backed by other cryptocurrencies. Despite both coins trading at around $1 per token, Dai overtook BUSD to become the third-largest stablecoin in 2023 and maintained that status until Q1 2024.

FAQs

How much is 1 DAI worth?

As of March 2024, DAI is trading at around $1 per token. With the coin soft-pegged to the USD, it has maintained a relatively stable value, with approximately a 0.01% price change since the previous month. 

What is the future of Dai crypto?

Based on its stablecoin status and decentralized structure, Dai is likely to remain relatively stable compared to cryptocurrencies that experience drastic price changes. These offerings could potentially make Dai attractive as a store of value and a means of payment, especially in the DeFi space. 

Is Dai always $1? 

Although Dai is designed to maintain the same value as the USD, its price is not precisely fixed. Market forces such as the volatility of its collateral, demand and supply, and regulatory challenges may cause Dai’s value to rise above or fall below $1.