Simply Explained: Dai (DAI)
DAI is an Ethereum-based stablecoin (an asset pegged to the US Dollar). It is collateralized by a mix of other cryptocurrencies that are deposited into smart-contract vaults every time new DAI is minted. This means 1 DAI remains 1 USD. The issuance and development of DAI are managed by the Maker Protocol and the MakerDAO decentralized autonomous organisation (an organisation that runs itself in a decentralized manner via the use of smart contracts).
The team and management of MakerDAO
The cool thing about this is that no single group or individual has control over the currency. Simply put, DAOs are like a democracy, whereas most currencies like USD are managed by a centralised entity (the federal reserve). The project is democratically managed by the holders of its Maker (MKR) governance tokens, comparable to a traditional company’s stock.
How is the currency managed?
MKR holders vote on key decisions regarding the development of MakerDAO, Maker Protocol and DAI. Their voting power is proportionate to the number of Maker tokens they own. The more tokens you have, the more influence you have over the project.
As a note on this, it can be argued that since MKR is a token that changes in price, there’s a disproportionate amount of power held by early investors.
What makes DAI so cool?
Purchasing power: The most attractive feature of DAI that entices most investors is its soft peg to the US dollar.
The crypto market is notorious for its volatility, which is not necessarily a bad thing. It’s important to have “cash, and liquid money” on standby for when opportunities arise. Imagine all your money was held in traditional coins, and the market crashes 30%. You have no buying power to make the most of the market. In the traditional world, many hedge and mutual funds hold significant money in cash for the same reasoning. Warren Buffet’s Berkshire Hathaway reportedly held 180 billion dollars in 2020.
Fight inflation and earn interest: However, there are many more advantages to holding DAI, and other stable coins over cash.
How much interest do you earn on your cash in a bank account? Typically sub 1%. This doesn’t even cover inflation! So holding money in cash, in the savings account on the market, will mean your money is losing value.
When you hold your money in stablecoins like DAI, interest rates are incredibly high and outperform inflation, hold, and gain value. We have a whole piece discussing earning from crypto savings accounts, staking and more, here.
Earning interest on your DAI (as of February 2022)
1. 2.45% on Coinbase
2. 5.75% on Celsius
3. 8.3% on Hodlnaut
4. 9% on BlockFi
5. 11% on CoinLoan
6. 12.75% on YouHodler
7. 19% on Midas Investment
Note, this is not financial advice, this is a demonstration to show the difference between the interest available on DAI compared to sub 1% in traditional finance.
Dai vs Tether
There are many other stablecoins on the market. One example of this is Tether (USDT). However, the market is a lot more sceptical of Tether and many crypto hardcores advocate DAI over Tether.
Why is this?
Security and stability
DAI is soft pegged to the dollar and uses other cryptocurrencies such as Bitcoin and Ethereum as collateral. This gives it more stability and security. Whereas a project like Tether uses forms of collateral such as cash and treasury bills. If you believe in the dollar then sure, Tether may be a good fit. But if you have concerns with the dollar, DAI may be a better fit.
The decentralisation of power
We discussed just how powerful and valuable decentralised organisations are. The democratic advantages are favourable and give more comfort to the holders. Tether, on the other hand, is run by a team of a few people who have raised capital through venture capital.
Now, this is by no means a piece that sways investors in the direction of DAI over USDT, but we use analogies here as an important tool to understand the projects we invest in.
If you were to look at DAI and Tether in terms of traditional companies, DAI is a community-run news organisation, whereas Tether is a corporate news channel that has raised money from investors.
Which of these is more likely to be pushing an agenda?
Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make, and only you are accountable for the results.
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