Stablecoin cryptocurrency
Dai (or DAI, formerly Sai or SAI) is a stablecoin on the Ethereum blockchain whose value is kept as close to one United States dollar as possible through a system of decentralized participants incentivized by smart contracts to perform maintenance and governance functions.[1] Dai is maintained and regulated by MakerDAO, a decentralized autonomous organization (DAO) composed of the owners of its governance token, MKR, who may propose and vote on changes to certain parameters in its smart contracts in order to ensure the stability of Dai.[2][3]
Together, Dai and MakerDAO are considered the first example of decentralized finance to receive significant adoption.[4]
Overview
Dai is created and destroyed through an overcollateralized loan and repayment process facilitated by MakerDAO's smart contracts in the form of a decentralized application. Users who deposit one of the accepted collateral types (such as Ether) into a contract are able to mint new DAI, as a loan, against the value of their collateral. The USD value of the collateral at any given time divided by the amount of DAI borrowed is the loan's "collateralization ratio"; this is calculated using the USD price of a unit of the collateral asset as reported regularly to a contract by a set of decentralized oracles. Each loan type has a fixed minimum collateralization ratio, which is usually in the range of 110-200%. If the collateralization ratio of a loan falls below the minimum ratio, anyone may call a certain function of the contract to cause a portion of the collateral to be sold for DAI on a decentralized exchange, which is then used to pay off the debt and pay a reward to the account that called the function. Setting a minimum ratio well above 100% provides enough time to sell the collateral to cover the debt in the event of a flash crash in the price of the collateral asset; generally, the lower a minimum ratio is, the higher the interest rate will be, to offset the systemic risk.[3][5]
Upon repayment of the loan and its accrued interest, the returned Dai is automatically destroyed, and the collateral is made available for withdrawal. In this way the USD value of Dai can be said to be backed by the USD value of the underlying collateral held by MakerDAO's smart contracts.[6] By controlling the types of accepted collateral, minimum collateralization ratios, and the interest rates for borrowing or storing Dai, MakerDAO is able to control the amount of Dai in circulation, and thus its value.[7]
The power to propose and implement changes to such variables is granted, through code, to holders of the MKR token. Owners of the governance token are able to vote on proposed modifications in equal proportion to the amount of tokens they hold. The MKR token also serves as an investment in the MakerDAO system. Added interest that borrowers pay back, on top of their loan's principal, is used to buy up MKR tokens from the market and burn them, taking them permanently out of circulation. This mechanism aims to make MKR deflationary in correlation to the revenues from lending Dai.[5][7]
History
MakerDAO was formed in 2014 by Danish entrepreneur Rune Christensen.[5]
On December 18, 2017, Dai was launched on the main Ethereum network. The price of Dai was successfully kept close to one US dollar during its first year of existence, even though the price of Ether, the only collateral available at the time, declined by more than 80% during the same time period.[7]
In September 2018, venture capital firm Andreessen Horowitz invested $15 million in MakerDAO by purchasing 6% of all MKR tokens.[7]
In 2018, MakerDAO formed the Maker Foundation, run from Copenhagen, which serves to help bootstrap the ecosystem by, for example, writing code needed for the platform to function and adapt.[8]
In 2019, MakerDAO experienced an internal struggle over whether to integrate more with the traditional financial system. Christensen wanted greater regulatory compliance to allow for assets besides cryptocurrency to serve as collateral for Dai. The struggle led to the departure of MakerDAO's CTO.[5]
In March 2020, as a result of extraordinary market volatility at the onset of the COVID-19 pandemic, Dai experienced a deflationary deleveraging spiral that, at its peak, caused it to trade for up to USD $1.11[citation needed] before returning to its intended $1.00 valuation.[9]
Name
According to Rune Christensen, the name of the cryptocurrency is based on the Chinese character 貸, which he translated as "to lend or to provide capital for a loan".[10]
