Whether it's exchanges, derivatives, loans, or prediction markets, nearly all real-world financial services have decentralized counterparts on Ethereum.
Dai emerged in this context, launched by MakerDAO on December 17, 2017, as Ethereum's first decentralized stablecoin, pegged 1:1 to the US dollar.
As an endogenous base currency within Ethereum's ecosystem, Dai has catalyzed the growth of the entire open finance landscape.
Transparency and Decentralization: Dai vs. USDT
Unlike the controversial mainstream stablecoin USDT, Dai is generated on-chain via smart contracts, ensuring:
- Full transparency: All issuance and redemption records are publicly verifiable on the blockchain.
- Permissionless access: No central authority controls Dai's supply.
- No over-issuance risk: Each Dai is backed by collateral, eliminating concerns like USDT's unbacked printing.
👉 Explore how Dai maintains its peg
How Dai Works: The CDP Smart Contract System
To understand Dai's stability, let's break down the Collateralized Debt Position (CDP) mechanism:
- Deposit Collateral: Users lock Ethereum (ETH) into the CDP smart contract.
Generate Dai: The system calculates a loan amount based on ETH's current value, applying a minimum 150% collateralization ratio.
- Example: To borrow 100 Dai, you must deposit ETH worth at least $150.
- Maintain Stability: If ETH's value drops, users must add collateral or repay Dai to avoid liquidation.
Key Features:
- Overcollateralization: Ensures Dai's value is always backed by excess assets.
- Auto-Liquidation: If collateral falls below 150%, ETH is auctioned to cover the debt, with a 13% penalty.
- Keeper Incentives: Participants earn 3% for liquidating undercollateralized CDPs.
Handling Black Swan Events
For extreme scenarios (e.g., sudden ETH price crashes), MakerDAO has safeguards:
- Global Settlement: Triggers if collateral can't cover Dai's value, allowing MKR holders to repurchase Dai at parity.
- MKR's Role: As governance tokens, MKR absorbs systemic risks and stabilizes Dai through adjustments.
FAQs
1. Why is Dai considered more transparent than USDT?
Dai’s reserves and transactions are fully on-chain, auditable by anyone, unlike USDT’s opaque backing.
2. What happens if ETH’s price drops sharply?
The system liquidates undercollateralized CDPs or initiates global settlement to protect Dai’s peg.
3. Can other stablecoins be used as Dai collateral?
Yes! Future upgrades may allow ERC-20 stablecoins like TUSD to back Dai, expanding its scalability.
👉 Discover Dai’s role in DeFi
Conclusion
Dai’s innovative design—combining overcollateralization, decentralized governance, and fail-safes—makes it a cornerstone of Ethereum’s DeFi ecosystem. Its transparency and resilience offer a compelling alternative to centralized stablecoins.