DAI is the first collateral-backed stablecoin pegged 1:1 to the US dollar. Generated by locking crypto assets into smart contracts, DAI facilitates cryptocurrency borrowing and lending. Unlike most centralized stablecoins, DAI operates decentralized—serving as a volatility hedge while enabling DeFi functions like trading and lending.
How DAI Works: Key Mechanisms
DAI maintains its dollar peg through Ethereum-based collateral managed by MakerDAO's smart contracts. Users deposit ETH or other approved assets into Maker Vaults (formerly CDPs) to borrow DAI, with these key features:
- 150% minimum collateralization ratio (e.g., $150 ETH to borrow $100 DAI)
- Automatic liquidation if collateral value falls below 150%
- Multi-Collateral System accepting ETH, BAT, USDC, WBTC, and more
DAI's Unique Advantages in DeFi
- Decentralization
No central entity controls DAI issuance—unlike fiat-backed stablecoins (USDT/USDC). Passive Income Opportunities
- DAI Savings Rate (DSR): Earn interest by locking DAI in Maker contracts
- Yield farming strategies often outperform borrowing costs
- Enhanced Security
Regular audits and community governance via MKR token holders minimize risks.
Addressing Common Concerns
High Collateralization Doesn't Deter Users Because:
- Borrowers retain crypto exposure while accessing liquidity
- Interest-earning potential outweighs borrowing costs
- No forced selling of appreciated assets
Limitations to Consider
- Crypto Volatility: Collateral value fluctuations require monitoring
- Liquidity Variability: Trading pair availability affects market depth
FAQs About DAI
Q: How is DAI different from USDT?
A: DAI uses crypto collateral and decentralized governance, while USDT relies on centralized fiat reserves.
Q: Can I lose money holding DAI?
A: The peg is generally stable, but smart contract risks exist (though mitigated by audits).
Q: What's the best use for DAI?
A: Ideal for DeFi lending, volatility hedging, and earning yield via protocols like 👉 Compound.
Future Outlook
DAI continues evolving through MakerDAO governance votes, with proposals to add new collateral types and stabilize the peg during market turbulence. Its transparent model sets a benchmark for decentralized stablecoins.
👉 Explore DAI lending opportunities in today's DeFi landscape.