Arctic Supports DAIMar 1, 2023
What You Need To Know About Multi-Collateral Stablecoin DAI
We are pleased to announce that Arctic Wallet welcomes DAI cryptocurrency – an ideal asset for anyone looking to diversify their crypto holdings without the risk of volatility.
- Users can now store, send and receive DAI on ERC20, BEP20, Solana, and Polygon networks at ease in Arctic Wallet.
- Exchange DAI with Arctic’s Crypto-to-Crypto, Crypto-to-Fiat, and Fiat-to-Crypto in-app conversion options.
|Image Sources: Arctic Wallet iOS & Android Apps|
With adding DAI to our list of supported assets, it is our hope that more people get the opportunity to explore the world of crypto with DAI and take advantage of this asset. Further on, we’ll delve into factors making DAI the perfect digital currency for value storage, while considering its peculiar features, vulnerabilities, and significance in the crypto market.
Definition of DAI Cryptocurrency
At the outset, let us inquire as to the precise definition of DAI cryptocurrency. In essence, it serves as a decentralized stablecoin that is inextricably tethered to the value of the US dollar. What it means is that DAI is intentionally structured to sustain an unwavering value of 1 USD, irrespective of the price of other cryptocurrencies or overall crypto market turbulence.
The stablecoin is part of a decentralized autonomous organization (DAO) of the Maker protocol, operating on the Ethereum blockchain. MakerDAO is tasked with the production and administration of DAI. The protocol has been purposefully designed to give power to the community, rather than executives.
Brief History of DAI
The nascent seeds of this digital currency were sown in 2015 when Rune Christensen unveiled the MakerDAO initiative. The objective of the project was to contrive a stable cryptocurrency that could serve as a dependable store of value and a medium of exchange for everyday transactions. In 2017, the first iteration of DAI was unveiled to the public. Since then, it has garnered a significant following and secured a position as one of the foremost stablecoins in the cryptocurrency arena.
The coin has shown the effective ability to maintain the 1:1 peg to USD, as the stablecoin price never went lower than $0.9455 per coin in 2022 unlike, for example, USDT or BUSD which have seen much lower lows on their path to stability.
|DAI Expanding the Stablecoins Market Share Over the Year 2022 / Source: Messari|
Importance of Stablecoins in the Cryptocurrency Market
Why are stablecoins fundamental for the cryptocurrency ecosystem, you may inquire?
- Due to their ability to resist the crypto market volatility, such assets have multiple applications, serving as a means of exchange, a store of value, or collateral for other financial products.
- Furthermore, stablecoins offer a bridge between the conventional financial system and the world of decentralized finance (DeFi), thereby allowing users to navigate and shuttle their funds with ease between these two distinct domains.
The importance of stablecoins has burgeoned for their ability to maintain a stable purchasing power. Since the technicality of implementing this idea varies from protocol to protocol, let’s dive into a bit more detailed review of the mechanisms that propel the stability DAI boasts.
How DAI Works
What is multi-collateral DAI?
The process of DAI generation is facilitated via a complex operation known as collateralization, which entails leveraging alternative assets as collateral to uphold the stablecoin’s value. Initially, the coin was backed by a single asset – Ethereum. In 2019, to minimize risks, the MakerDAO community commenced diversifying collaterals with other ERC-20 tokens and real-world assets.
Three asset classes that back the MakerDAO-issued stablecoin are:
- Altcoins (ETH, MATIC, WBTC, etc);
- Stablecoins (USDC, USDP, GUSD);
- Real-World Assets (RWA): treasury bills, bonds, debts, etc.
|DAI Collateralization Breakdown / Source: Daistats.com|
Maintaining a 1:1 peg
To generate the DAI, the collateral is deposited into smart contracts on the Ethereum blockchain and is subject to rigorous risk management and price monitoring.
- If the price of the stablecoin falls below the symbolic threshold of $1, market forces incentivize users to procure DAI and vend it back to the market for a lucrative profit.
- On the other hand, if the value of DAI skyrockets beyond the $1 benchmark, governance mechanisms allow for the creation of novel DAI to recalibrate the value back down to the USD 1 threshold.
Over-Collateralization as a protective measure
Another facet guaranteeing price stability is DAI being overly collateralized. More to that, the riskier the tokens deposited into the protocol are, the higher the collateralization ratio will be. For example, to mint 1 DAI, $1.7 worth of ETH and $1.75 of Wrapped Bitcoin must be deposited so that if the valuation of the collateral drops, the stablecoin’s value remains protected.
|Collateralization Setup of DAI / Source: Oasis.app|
Use Cases of DAI
DAI, a highly versatile decentralized stablecoin, showcases an impressive array of use cases within the DeFi space. Its functionality as a medium of exchange offers the stability of the US dollar without the need for a central authority, making it a highly sought-after digital asset for everyday transactions.
DAI's convenience and efficiency further extend to cross-border payments and remittances, delivering fast and inexpensive transfers without intermediaries. The world of DeFi also benefits from DAI's potential for lending and borrowing, providing secure and stable collateral to access loans and earn interest. Moreover, it serves as collateral for other financial products such as derivatives and options, augmenting its already diverse utility.
Advantages and Disadvantages of DAI
On the flip side, the use of collateralized stablecoins, such as DAI, poses potential risks, subject to the volatility of collateral assets. Additionally, governance attacks may compromise the DAI system's security, prompting caution in its usage.
Concerns are raised in the community regarding USDC, a centrally-governed stablecoin, making up around 40% of the coin backing, which is viewed as a potential threat to DAI’s decentralization. The MakerDAO is navigating these regulatory challenges by further underlying assets’ diversification.
Despite its potential shortcomings, the unique benefits of the stablecoin remain highly attractive to those seeking a swift, dependable, and secure digital currency in the DeFi space. DAI's stability and transparency grant it a significant advantage over other cryptocurrencies.
Bottom Line: Future of DAI
Despite the challenges DAI faces, it is yet free of centralized control risks, by far being the most censorship-resistant of the top-ranked stablecoins. DAI price stability being kept a strict watch, the MakerDAO is diligently exploring diverse methods to employ alternative collateral types, including tangible assets, which could substantially augment the coin use cases.
The stablecoin also presents abundant opportunities for growth and widespread adoption. Its capacity to serve various financial applications beyond the scope of stable value storage makes it a highly promising venture with an optimistic outlook. Moreover, as the realm of decentralized finance continues to thrive and mature, DAI is likely to assume an increasingly prominent role as a crucial link between the traditional financial system and the world of DeFi.