What is DAI?
DAI is a decentralized stablecoin created by the MakerDAO protocol. It is designed to maintain a stable value, usually pegged to the US Dollar, making it a useful tool in the world of Decentralized Finance (DeFi). Unlike traditional stablecoins that are backed by fiat currency reserves, DAI is backed by collateral held in smart contracts. Users can generate DAI by locking up Ethereum (ETH) and other approved cryptocurrencies as collateral.
The main goal of DAI is to provide a stable means of exchange that is free from the volatility typically associated with cryptocurrencies. This stability is achieved through an automated system of smart contracts that manage the collateral and ensure that the DAI remains pegged to the dollar. If the value of the collateral drops too low, the system automatically liquidates the collateral to maintain the stability of DAI, protecting the overall ecosystem.
DAI can be used for a variety of purposes within the DeFi ecosystem. Users can lend, borrow, or trade DAI on various decentralized platforms, providing liquidity and enabling a range of financial activities without the need for intermediaries. DAI also earns interest when deposited into lending protocols, allowing users to generate passive income from their holdings.
Overall, DAI exemplifies the innovations in finance offered by blockchain technology, combining the benefits of stability and decentralization, which are essential in the growing landscape of digital currencies and financial systems.