Crypto tokens have become one of the most popular investment avenues in recent years. The rapid growth of coins like Bitcoin makes them especially attractive to hobbyists and amateur traders. But this same volatility also makes it unsuitable for many payment applications. The DAI crypto token is a “stablecoin” created to address this shortcoming of other crypto tokens. So how does it do this?
How Does DAI Work?
A stablecoin is a crypto token that eliminates price volatility. They maintain a fixed price level to ensure ease of transaction. With a stablecoin, you do not have to worry about your holdings rising or falling sharply.
Usually, stablecoins are pegged to an asset like the US Dollar, gold or silver. They are backed by fiat money, assets or even stabilised algorithmically.
Read more: DAI VS USDT
What is DAI Backed By?
DAI is a popular stablecoin pegged to the US Dollar, like many other options in the space. However, DAI is unique in maintaining its peg by using other crypto tokens as collateral. A pool of cryptos is automatically managed through smart contracts to ensure the DAI tokens hold a 1:1 price with the US dollar.
What is DAI Staking?
Unlike regular crypto tokens, stablecoins are not created as block rewards for validators. Instead, DAI tokens are created whenever a user deposits crypto as collateral against DAI. Therefore, DAI staking does not work the same as other platforms.
There are many ways you can earn from DAI. The first is through DeFi staking or liquidity staking. This is a process where you lock your DAI into a lending platform’s smart contract. This money is used to provide liquidity to borrowers on that platform.
You earn LP (liquidity provider) tokens as a reward for giving your capital. DAI interest rates vary from 1% to 12%, depending on the DeFi protocol and contract you choose.
Second, you can acquire MKR tokens. MakerDAO is the decentralised organisation behind DAI. If you stake MKR tokens, you can participate in governing DAI and its operations. This also grants you more tokens as staking rewards.
DAI Benefits
No Volatility
Since DAI is a stablecoin, it experiences very little volatility and stays in a band of $0.99 to $1.01. This makes it an excellent option for payments or hedging if you believe the market is going to fall.
Decentralised
DAI is governed by the MakerDAO, which is decentralized and controlled entirely by its users. There is no single entity that can influence DAI’s functioning, ensuring its future is determined by stakeholders in the DAI ecosystem.
Secure and Audited
The DAI ecosystem is highly secure thanks to its decentralisation, cryptographic safety and regular audits. These audits, conducted by trusted third parties, validate that the required number of crypto tokens are maintained as collateral. These reports are also available to the public for verification.
Fast and Efficient
DAI can also be used for international and cross-border transfers. Using traditional systems, this process can take 2-4 days and cost exorbitant amounts of money. DAI can complete international transfers in seconds, with very low transaction costs.
DAI Example
Obtaining DAI works like getting a loan from a bank. Since DAI is collateralised by other crypto tokens, you must acquire enough ETH or other supported tokens to get DAI. This amount is then deposited on the platform and DAI is issued as a loan. To retrieve your collateral, you must simply return an equal amount of DAI to the platform.
Suppose you want to get $100 in DAI. To do this, you would need a higher amount of collateral, since crypto tokens can be volatile. This number is currently around 150% of the loan amount.
In this case, you have to deposit at least $150 in other cryptos like ETH. Once this is done, $100 in DAI will be loaned out to you. This can be used for staking, transactions or any other activity. To get your collateral back, simply return $100 of DAI to the platform.
Does DAI Have A Future?
DAI has been highly influential in DeFi and payments ever since it was released. It solves a major problem that plagues most other types of crypto tokens, which is volatility. As long as other options on the market continue to have unstable pricing, DAI will remain relevant in the market.
The only competition it may face is from other stablecoins that use alternative types of collateral, like algorithmic stabilization or fiat money. If either of these options emerges as a better method than crypto collateralization, DAI’s position in the market will suffer.
Conclusion
DAI is a highly effective and popular tool used by crypto enthusiasts to trade and pay safely. Its unique collateral system and stable pricing make it a highly attractive option to use. As discussed above, it will continue to be relevant as long as other crypto options are volatile and crypto collateralisation does not cause it to suffer.
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FAQ on DAI Token
Why Use DAI?
DAI ensures that your payments and holdings do not change drastically in value. Stablecoins like DAI help eliminate the risk of sudden value changes and allow you to hedge your portfolio if you think the market will fall.
Is DAI a Stablecoin?
Yes, DAI is a crypto-backed stablecoin that is indirectly pegged to the US dollar.
Is DAI Worth Staking?
DAI offers many options for staking, where some are in its ecosystem while others are DeFi applications. Either way, it offers compelling returns and the option of passive income by just providing your funds. This is a great opportunity for many users.
How Safe is DAI?
DAI is a tried and tested system that maintains its peg at most times. It is also regularly audited to ensure that all disclosed token balances are accurate.
