What Is DAI?
DAI is an ERC20 stablecoin on the Ethereum blockchain. This means that the DAI token is pegged to the value of a fiat currency. In this case, DAI is pegged to the US Dollar. In other words, 1 DAI is, in theory, always equal to 1 US Dollar.
Other than being a stablecoin, DAI is also the main currency of the Maker DAO collateral-based lending system. In this lending system, users who wish to take a loan can do so by locking in Ether (ETH) and other ERC20 crypto assets as collateral to borrow DAI.
When the borrower returns the DAI to the system, their cryptocurrency assets are unlocked and returned to them. They also pay a small fee for borrowing the DAI, just like in a traditional banking system.
A Deeper Look at This Term
As mentioned before, DAI is a critical part of the MakerDAO collateral-lending system. Therefore, it is a product of MakerDAO, a company which was founded by its CEO, Rune Christensen.
Collateral lending provides a way for individuals to borrow money by securing or ‘locking away’ assets they own. In this case, users lock away other tokens to borrow the stable DAI token. DAI can then be used as any other cryptocurrency, i.e., it can be traded, used to make purchases, or used as savings. If the borrowers wish to recover their collateral, they must return the borrowed DAI with some additional interest.
Unlike other stablecoins, which maintain their stability by being backed by the US dollar, DAI is backed by other ERC20 tokens used as collateral. MakerDAO’s algorithms manage the price of DAI by burning tokens to stabilize its value if the price drifts too far away from 1 US dollar.
Like everything on the blockchain, DAI is decentralized, permissionless, and requires no third parties. Everything on the lending system is managed and executed by smart contracts.
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