Dai dai
What is Dai?
Dai (DAI) is a decentralized, overcollateralized stablecoin designed to maintain a value close to one US dollar. Unlike fiat-backed stablecoins that rely on a company's bank deposits, DAI is issued through smart contracts on Ethereum when users deposit collateral assets into Maker Vaults. The system is governed by MKR token holders (transitioning to SKY) who set risk parameters for each collateral type.
Originally launched as Single-Collateral Dai in December 2017 (backed only by ETH), it evolved to Multi-Collateral Dai in November 2019, accepting various assets like ETH, WBTC, USDC, and others. Each Vault has specific parameters: a liquidation ratio (minimum collateral-to-debt ratio), a debt ceiling (maximum DAI that can be issued against that collateral), and a stability fee (interest rate on borrowed DAI).
DAI maintains its peg through economic incentives rather than direct redemption guarantees. The Peg Stability Module (PSM) allows 1:1 swaps between DAI and USDC, while arbitrageurs profit from price deviations by minting or redeeming DAI. If collateral values fall below liquidation thresholds, keepers trigger auctions to sell collateral and cover the debt before the system becomes undercollateralized.
What problem does Dai solve?
DAI addresses the need for a stable unit of account in decentralized finance without relying on traditional banking infrastructure. Crypto traders need a stable asset to hedge volatility without exiting to fiat; DeFi protocols need reliable collateral and liquidity; users in unstable economies need dollar exposure without bank access. Centralized stablecoins introduce counterparty and censorship risks; purely algorithmic stablecoins have historically failed catastrophically.
DAI's solution is overcollateralization: users lock more value than they borrow, creating a buffer against price drops. This makes DAI trustless (no company to trust) and censorship-resistant (no central freeze button), though it requires overcollateralization (inefficient capital) and relies on oracle price feeds (external data risk) and governance decisions (human risk).
How does Dai work?
Users deposit collateral into Maker Vaults (formerly CDPs) to mint DAI. The Vault tracks collateral value, DAI debt, and accrued stability fees. Users can withdraw collateral only if the resulting collateralization ratio stays above the liquidation threshold. If the ratio falls too low, keepers can trigger liquidation: the collateral is auctioned to cover the DAI debt plus a liquidation penalty, protecting the system from bad debt.
The Peg Stability Module (PSM) allows direct 1:1 conversion between DAI and USDC, providing hard peg support. When DAI trades above $1, arbitrageurs deposit USDC to mint DAI and sell it for profit, increasing supply and pushing price down. When DAI trades below $1, they buy DAI cheaply and redeem it for USDC via the PSM, reducing supply and pushing price up.
Governance controls all parameters: which collaterals are accepted, liquidation ratios, stability fees, debt ceilings, and the Dai Savings Rate (DSR). MKR holders vote on these changes. The DSR allows DAI holders to earn yield by locking DAI in a special contract, with rates set by governance to influence DAI demand and supply dynamics.
Key facts
- Launch date: Single-Collateral Dai (SAI) launched December 2017; Multi-Collateral Dai (DAI) launched November 2019
- Token standard: ERC-20 on Ethereum
- Backing: Overcollateralized crypto assets (ETH, WBTC, USDC, etc.) held in Maker Vaults
- Governance: MKR token holders vote on risk parameters; transitioning to SKY token governance
- Peg mechanism: Soft $1 target via PSM 1:1 USDC swaps, arbitrage, and supply/demand incentives
- Liquidation: Automated auctions when collateral falls below liquidation ratio
- Dai Savings Rate: Governance-set yield for locked DAI, influencing demand
- Sky transition: MakerDAO rebranding to Sky; DAI convertible 1:1 to USDS (Sky Dollar) via official converter
- Global settlement: Emergency shutdown mechanism exists as last resort to settle all Vaults at collateral value
Official links
Categories
Related coins
Compare
Frequently asked questions
Is DAI decentralized?
DAI is more decentralized than fiat-backed stablecoins because issuance happens through smart contracts, not company bank accounts. However, it relies on oracle price feeds, governance decisions by MKR/SKY holders, and keeper networks for liquidations. These are distributed but not perfectly trustless components.
What is a Maker Vault (CDP)?
A Vault is a smart contract position where you deposit collateral (like ETH) to mint DAI. It tracks your collateral amount, DAI debt, and stability fees. You can manage the Vault by adding collateral, repaying DAI, or withdrawing excess collateral, as long as you stay above the liquidation ratio.
How does DAI maintain its $1 peg?
Three mechanisms: (1) PSM allows 1:1 swaps with USDC, (2) arbitrageurs mint DAI when price > $1 and redeem when < $1, (3) governance adjusts stability fees and DSR to influence supply and demand. No mechanism guarantees perfect peg under extreme market stress.
What backs DAI?
Overcollateralized crypto assets in Maker Vaults. Each DAI in circulation is backed by more than $1 of collateral (ETH, WBTC, USDC, etc.). If collateral value drops, liquidations automatically sell collateral to cover DAI debt before the system becomes undercollateralized.
What happens if my Vault is undercollateralized?
Keepers monitor Vaults and trigger liquidation when the collateralization ratio falls below the threshold. Your collateral is auctioned to cover your DAI debt plus a liquidation penalty. Any remaining collateral after debt and penalty is returned to you.
What is the difference between DAI and USDS?
USDS (Sky Dollar) is the newer stablecoin in the Sky ecosystem (rebranded MakerDAO). DAI and USDS are convertible 1:1 through the official converter. USDS is governed by SKY holders and has different collateral parameters. DAI remains the legacy token with established DeFi integrations.
Can DAI lose its peg?
Yes, under extreme conditions. If collateral crashes faster than liquidations can process, or if governance makes bad parameter choices, or if the PSM runs out of USDC, DAI can trade away from $1. Historical events like March 2020 (Black Thursday) showed DAI trading above $1 due to liquidity crunches.
External trackers
Choose a tracking site for Dai: