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Stablecoins have gained a portion of disputation this year thanks to the collapse of UST and its $ 18B market part , but there is another stablecoin calledDAIthat work quite otherwise . DAI ’s issuer , Maker Protocol , has been dubbed the ' Reserve Bank of DeFi ' due to its vast role indecentralized finance ( DeFi ) software . It was one of the first DeFi applications make . DAI has since become the digital dollar of DeFi and is the prefer stablecoin among crypto enthusiasts who assess transparency and decentralization .
Stablecoins are cryptocurrencies worth one dollar , and they come in three varieties : order - back , crypto - stake and algorithmic . Fiat - indorse stablecoins are backed by fiat currency ( i.e. , dollars ) in a cant score and are issued by a centralized company capable of arbitrarily freezing tokens . Algorithmic stablecoins are backed by nothing but are stabilize by a minting and burning algorithm that artificially controls supplying and necessitate economics and is managed byautonomous blockchain smart contractsthat are incapable of stop dead relic . Finally , crypto - back stablecoins are created by take up against cryptocurrencies fix into a DeFi communications protocol and are also manage by voguish contract . There arereasons why some stablecoins collapseand others do n’t , though it is in the first place a problem suffer by algorithmic stablecoins . In contrast , fiat - backed and crypto - back stablecoins have n’t sustain any ruinous collapse ( yet ) .
Related : What Are Crypto Banks & Why Are They Important For Mass Adoption ?
DAI ( also spelled Dai ) was the first crypto - backed stablecoin to subsist , and allot toCoinGeckocurrently accounts for $ 5.79B of value . AsMakerDAOexplains , DAI is created by users depositing ETH , BTC and other cryptocurrencies into ' Vaults ' to borrow a fraction of their dollar mark note value in DAI . The deposited crypto then becomes a ' Collateralized Debt Position , ' or ' CDP , ' and is locked up until the debt is paid off . If crypto terms fall too low , then the CDP is auctioneer off for the amount of DAI owed , which burn the DAI make by the CDP . Unlike the stablecoins USDT and USDC , DAI is carry off by adecentralized autonomous organisation ( DAO)called MakerDAO , which actively manages DAI ’s pecuniary insurance to protect its stability .
How Well Does DAI Hold Its Value?
To everyone ’s surprisal , DAI held its peg to the dollar better than the largest fiat - backed stablecoins , USDT and USDC , during the Terra / UST crisis in May , even though DAI can not be redeemed for dollars . This is partly due to the Dai Savings Rate ( DSR ) and the Stability Fee . The DSR allows DAI holders to lock up their DAI and receive partial interest group payments made by DAI borrower , while the Stability Fee shape the interestingness rate owed by DAI borrowers . Both of these mechanism control the circulating supply of DAI on the open market , which influences price stability .
This system made Maker Protocol the firstcryptocurrency lending and adoption appof the DeFi diligence . Its unofficial title as the ' Reserve Bank of DeFi ' is earned because of MakerDAO ’s active direction of DAI ’s pursuit rates , similar to how the Federal Reserve manages the buck ’s interest pace . However , DAI will not be the only crypto - backed stablecoin on Ethereum whenAave ’s new GHO stablecoinrolls onto the blockchain . At that point , Aave and Maker Protocol will roleplay as decentralised reserve banks for their respective crypto - dollar mark .
DAI is dissimilar from other stablecoins because it is not plunk for by fiat currency or issued by a centralised company , nor can anyone ’s DAI holdings be frozen . Instead , DAI is loaned out to crypto holder who lock up their asset , allowing them to get at part of their crypto ’s time value without trade it . People not concerned in holding explosive cryptocurrencies can purchaseDAIfrom a crypto substitution and mesh it up to bring in theDaiSavings pace , which reward interest without the risks associated with lending .
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author : CoinGecko , MakerDAO
