What’s a stablecoin? It’s just another type of cryptocurrency that helps us overcome the volatile nature of cryptocurrencies, which acts as a disadvantage for some people. As the name suggests, stablecoins are stable in nature and try to maintain their value equivalent to the U.S. dollar or assets such as gold.
As you might already know, Bitcoin and Ethereum are the two most popular cryptocurrencies in the blockchain world. But what doesn’t work in their favor is their highly volatile nature. This is where stablecoins come into the picture. Some of the leading examples are Tether (USDT), USD Coin (USDC), Dai (DAI), Binance USD (BUSD), Pax Dollar (USDP), TrueUSD (TUSD), and Digix Gold Token (DGX).
MakerDAO, the company which developed DAI, is going through huge changes in order to go full decentralized, which can affect governance protocol and DAI stablecoin's mechanism of decentralization to a great extent. With such rapid changes, what does the future hold for DAI stablecoin? Let’s find out!
What Is DAI?
DAI is a type of stable cryptocurrency which aims at maintaining an exact ratio of one-to-one with the American dollar ($) with the help of an automated system consisting of smart contracts on the Ethereum blockchain. Controlled and regulated by MakerDAO, DAI stablecoin is the world’s first stable cryptocurrency coin launched on Ethereum. MakerDAO is a nonprofit foundation focused on making the cryptocurrency economy more stable.
DAI’s first development began in 2015, led by Rune Christensen — the co-founder and CEO of MakerDAO. Before Christensen tried his hands on crypto, he established a business that recruited Westerners to teach English in China. He came across Bitcoin in 2011 and decided to sell his business so he could invest in the asset. Later in 2014, Mt. Gox, a bitcoin exchange company, collapsed, and Christensen turned to stablecoins. And that is how MakerDAO came into existence.
Who Controls DAI?
MakerDAO officially launched the DAI coin in 2017 as a product of MakerDAO, with its smart contracts, on the Ethereum blockchain. Unlike other asset-backed cryptocurrencies, there is no central organization controlling DAI. Such is the case with Tether (USDT), run by Tether Holdings. Users submit ETH or ERC-20 tokens into a smart contract using assets in the form of collateral.
Therefore, there is neither a financial entity nor a central organization behind DAI controlling its value. Over time, DAI has proven to be one of the best decentralized stablecoins. Not only this, but it’s the best option for traders apart from USDT. Please keep in mind that the value of DAI is only determined by the market. Ether backs DAI, but this does not signify that DAI will lose its traction if ETH faces price drops. Here are some advantages of DAI stablecoin:
- No account minimum
- Stable value
- Decentralized freedom
- Income generation
- Fast and cheap
- Always on
- Highly secure
Is DAI Safe?
Yes, DAI is pretty safe to use. You can use DAI stablecoin as a system of lending and borrowing crypto assets. And the best part? You don’t need any broker for the same. Also, users who deposit Ethereum or other cryptocurrencies can get freshly created DAI coins by borrowing against the value of their deposits. In short, if you deposit $150 worth of Ether, you can borrow up to 100 DAI, i.e., roughly equivalent to $100. Just in case the security price drops below this ratio, the loan can be automatically converted by smart contracts. And if the value rises, you can borrow additional DAI.
- The project has received $54.5 million across seven fundraising rounds.
- It has notable investors, such as Dragonfly Capital Partners, Placeholder, Bloccelerate, Paradigm Capital Management, Walden Bridge Capital, Scanate, 1confirmation, Iconium, Andreessen Horowitz, and Polychain Capital.
DAI Stablecoin’s Price History
DAI was launched in December 2017, almost three years after its governing decentralized autonomous organization (DAO) called MakerDAO was created. Its price typically remains around the $1 mark since the cryptocurrency is pegged to the dollar. However, there have been instances when its price shifted away from that level, mostly when the supply and demand for the stablecoin changed.
- DAI’s price tends to hover beneath $1 when supply is high, but demand is low and vice versa.
- In September 2020, DAI hit an all-time high of $1.14.
- It hit an all-time low of $0.8935 in June 2021.
DAI stablecoin doesn’t have a maximum supply limit since it’s issued on demand by those who provide the necessary collateral. DAI carries a burning mechanism that can be ignited by users who are in debt while repaying the principal of their loan value. The interest payments (paid in DAI) will recirculate onto the open market. Another thing to keep in mind is that DAI stablecoin can be issued only when you submit the proper collateral at the indicated collateralization rate.
How Does DAI Work?
As we mentioned earlier, DAI is truly decentralized and maintained by MakerDAO — an open-source project on the Ethereum blockchain. While other stablecoins, such as tether (USDT), USD coin (USDC), and Binance USD (BUSD) are maintained by other entities. People with its governance crypto token, MKR, are the ones who manage the Maker Protocol and the financial risks of DAI. DAI stays on the Ethereum blockchain and doesn’t have a native consensus algorithm. Also, it doesn’t even have any specific features other than the ones provided by Ethereum itself. Thus:
- You can use DAI stablecoin to lend, borrow, and invest in various applications, protocols, services, and products.
- DAI can also be used as a currency to trade against crypto assets because it’s implemented as one of the base trading options by some platforms.
- DAI creation takes place when you borrow against your locked collateral, which is usually 150% of the loaned amount. Let’s try to understand this with an example: if you wished to mint DAI worth $1,000, you would need to deposit $1,500 worth of Ether. Also, remember that you will need to repay the borrowed amount of DAI within a certain period. Failing to do so can lead you automatically to lose the collateral.
How Does DAI Maintain its Peg?
DAI relies on a target rate feedback mechanism (TRFM) to maintain its peg to the U.S. dollar. Here is how it works:
- The TRFM increases to move the price back to the original peg if the value drops below $1.
- Such development brings some flexibility for DAI holders since it allows them to realize a profit and demand for the stablecoin to increase.
- MakerDAO governs the process of adjusting the price of DAI in a decentralized manner with the help of a software protocol.
You should know that creating DAI doesn’t require express permission from anyone because the protocol is openly accessible to everyone. To collate price data from various external price feeds, DAI stablecoin and MakerDAO use an oracle system. If there is any price feed update, it’s written to the Ethereum blockchain through smart contracts owned and deployed by feed operators.
Conclusions: The Future of DAI
When an Emergency Shutdown is triggered, users get to participate in a collateral redemption process that allows users to exchange their DAI for collateralized assets at the rate of $1. And since DAI and the Maker Protocol are fully decentralized and open-source, anyone can redeploy the system as soon as the wind-down process has finished. A wide variety of wallets supports DAI. Here are some examples:
- Mobile wallets: Coinbase wallet and Celcius DexWallet
- Paper wallets: MyEther Wallet and MyCrypto
- Hardware wallets: Trezor and Ledger
DAI stablecoin’s future price will most likely be the same since it’s a stablecoin. It is intended to stay as close to $1 as possible. Please make a note that the rate may vary from time to time as the collateral-to-debt ratio of the protocol is always in flux. As of today:
- The 24-hour trading volume of DAI is €303,450,106.
- DAI is currently ranked #13 of all cryptocurrencies by total market capitalization, with a market cap of €6,424,965,605.
- You can access DAI’s circulating supply live, day by day.
As per DigitalCoinPrice, there will be ongoing stability, with a DAI coin price prediction for 2022 onwards from $1.00 to $1.01. WalletInvestor’s DAI coin price prediction is that it will be worth $1.001 in a year. Theoretically, any price prediction for DAI for 2025 or 2030 should be similar to the figures above since it’s supposed to remain pegged to the dollar. While the future of DAI stablecoin remains uncertain and crypto ecosystem moves quicker minute by minute, one thing is for sure: DAI represents a very good alternative for people who want to escape volatility and seek trust -always remember, this is not financial advise and at Rather Labs, we recommend you to do your own research-. See you next time!
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