What is DAI?
DAI is a decentralized stablecoin that aims to maintain a value of one US dollar. It is a crucial component of the decentralized finance (DeFi) ecosystem built on the Ethereum blockchain.
Key Features
- Decentralization: Unlike traditional stablecoins backed by fiat currency, DAI is governed by smart contracts and relies on collateralized debt positions (CDPs).
- Stability: DAI uses an automated mechanism that adjusts the supply of the currency to combat volatility and maintain price stability.
- Collateralization: Users can lock assets like ETH in a smart contract to generate DAI, ensuring that the system remains solvent.
How DAI Works
To create DAI, users deposit collateral into the Maker Protocol. This collateral is monitored, and if its value drops below a specific threshold, the system automatically liquidates it to cover DAI's value. This mechanism ensures that DAI remains pegged to the US dollar.
Role in DeFi
DAI is widely used in various DeFi applications such as lending platforms, decentralized exchanges, and yield farming. Its stability combined with the decentralized nature makes it a popular choice for users in the blockchain space.
Conclusion
In summary, DAI is a significant player in the stablecoin landscape of DeFi, combining the advantages of decentralization with the stability needed for everyday transactions and financial applications.