Today we start to see another crypto. As probably have you already read from the title, we will talk about a stablecoin: DAI!

In the last review, I talked about Wrapped Ethereum (WETH), If you missed my last review, you can recover it here!

OVERVIEW

First, what is a Stablecoin?

A more than legitimate question for anyone entering the world of cryptocurrencies, which presents a rather complex set of terms and dynamics. But, if the goal is to make transactions in this area, then you really cannot ignore knowing these factors.

A Stablecoin is a currency that mirrors the value of the fiat currency to which it is pegged, maintaining a constant 1-to-1 ratio. Too complex? It is much simpler and more straightforward than it might seem. Let's start with fiat currencies, which are the banknotes you clutch in your hands every day, and which are used around the world in normal transactions. This group includes the Euro, the Dollar, the Yen, and any other national currency on the face of the earth.

Stablecoins are their digital transposition, that is, a cryptocurrency that maintains a 1-to-1 relationship with the fiat currency the creators have chosen. So, a digital dollar must always be worth as much as a physical dollar, otherwise there would be no point in the existence of such a Stablecoin.

Why use a crypto when fiat currency exists?

Simple, because the cryptocurrency world moves too fast and on completely different tracks than traditional finance. On exchanges, people move billions of dollars in a very few seconds, which fits poorly with the dynamics of paper currency. Imagine having to deal with banking intermediaries every time you carry out a transaction, having to submit to technical times, conversion costs, weekend closures and other issues typical of this industry. That would be quite a detriment to a world that is going at breakneck speed and trying to operate completely autonomously.

Image source: CoinMarketCap

What is DAI?

The cryptocurrency Dai (DAI) is an ERC-20 token that is designed to function as a stablecoin or stable currency whose value is pegged to the dollar. This currency is issued in a decentralized manner through the collateralization of collateral that serves to always guarantee its issuance.

The currency and the entire protocol that supports its operation were designed by MakerDAO, one of the projects with the longest history in the ecosystem. Indeed, MakerDAO is a project that has demonstrated unprecedented transparency, technical and economic quality. All this has made it the stable currency, or stablecoin, that does not need to provide fiat collateral, making it one of the world's favorite tokens.

The origin of DAI, the first decentralized stablecoin

The origins of DAI begin with the creation of MakerDAO in 2014. Since then, the project aimed to create a DAO to support a stable currency within Ethereum. The idea was something totally new, something like it had never been built before, and its developers took enough time to design a clear proposal on how to do it without failing.

So, the first version of DAI was released. With this, it became the first structure of a highly decentralized stablecoin. Its control was governed by smart contracts or smart contracts and not by fiat on a bank account. Moreover, all its variables were decided by a DAO, in which token maker (MKR) holders could participate.

The birth of DAI gave a huge boost to the DeFi ecosystem, which was only a few months old and was proof that something big was yet to come. Since then, this has been one of the most eye-catching stablecoin projects in the cryptocurrency world. Its transparency, wide acceptance, and the enormous flexibility of its operation have made it a model for development in the cryptocurrency world.

DEEPENING

In this section (DEEPENING) we talk about more features of DAI!

In the previous section (OVERVIEW) I introduced you Dai (DAI) and I said that is an ERC-20 token that is designed to function as a stablecoin or stable currency whose value is pegged to the dollar. This currency is issued in a decentralized manner through the collateralization of collateral that serves to always guarantee its issuance. The currency and the entire protocol that supports its operation were designed by MakerDAO, one of the projects with the longest history in the ecosystem.

DAI goals

Now, what goals really led to the creation of DAI?

In response to this we can say that the main objective was to create a safe medium to store value. As we know, coins like BTC and ETH, suffer from high volatility given the period of industry growth we are in. This volatility is not a problem in economic systems that seek to generate profits by exploiting this feature. But in use cases such as loans, savings or money transfer platforms, this volatility is counterproductive and even undesirable.

Faced with this situation, DAI proposes a solution. Thanks to a collateral system, DAI can be generated with a 1:1 value against the dollar used highly volatile cryptocurrencies. In this way, the generated coins can be used to make fixed and stable value transactions on other platforms, with the assurance that said coins are secured by a deposit. Therefore, regardless of whether the value of cryptocurrencies goes up or down, the value generated will always be the same and, in the worst-case scenario, there are guarantees to avoid loss of value.

Undoubtedly a novel idea that allows us to develop new features that leverage the potential of blockchain. Especially those that need a stable and decentralized medium of value exchange. A medium that can be freely exchanged and repurposed seamlessly, in the last case needed to recover the value of your collateral. At this point DAI meets these needs and opens the door to such developments. Indeed, thanks to DAI, your holders can get a steady return on their holdings. And this is all thanks to collateralization, the creation of autonomous feedback mechanisms, and external actors duly incentivized to maintain the dynamism of the system.

DAI is the key building block for generating a robust and functional decentralized lending platform on the Ethereum blockchain. And this has certainly helped the DeFi ecosystem grow the way it has grown.

Image source: https://makerdao.com/en/

Pros and cons of DAI

Some of the pros we can find in this currency include:

• It is a secure and decentralized stablecoin with a long history of security.
• It is not dependent on banks, being a completely different stablecoin from USDT. In other words, there is no constant risk that the bank will close or take possession of the account that supports the entire protocol, nor is it necessary to trust that these funds exist in the bank.
• It facilitates the creation of decentralized means of exchange and financing. In fact, DAI is one of the most widely accepted currencies in the DeFi and DEX world at present.
• Its proven stability system generates confidence in its operation. Even in the worst scenarios, MakerDAO has been able to maintain stability at acceptable values and, in fact, has improved stability over time.
• It is easily accessible and respects the privacy of its users. Anyone can access the system without KYC or providing your data to a third party.
  Ability to generate credit and interest for that credit, making it a powerful option for investing.
• It is a widely supported stablecoin in many exchanges.

However, on the negative side we can mention:

• It is a bit complex on a technical level, which makes access a bit difficult for people who are just starting out in the DeFi world.
• The limited variety of currencies as collateral is seen as a system problem. In fact, tokens such as Compound or YFI are not yet accepted as collateral, while MANA (a token with less scope) is.
• There are risks involved in using Maker Vault. Remember that to generate DAI you must transfer ownership of your assets to a smart contract that can sell your assets if the mercado declines. Any deposit with DAI generated has a liquidation price, the price of the underlying asset at which the deposit would be liquidated. Using a vault for leverage represents additional risk. The potential for reward is increased through leverage, but the potential for loss is also amplified. It is common practice among users to maintain a high collateral ratio to protect against market risk and thus liquidation.
• A smart contract is transparent and immutable, but it can be breached. Nothing guarantees that it cannot happen like the famous hack of the DAO.

Have you already used DAI into DeFi?

Next week I’ll introduce to you a new cryptocurrency.