What exactly is Dai? Dai is a cryptocurrency that seeks to be worth exactly one US dollar; it is known as a stablecoin because its value is stable; other cryptocurrencies fluctuate in value against the US dollar, but not Dai; Dai aims to be worth as close to one dollar as possible since it is a stablecoin. People who own Dai are less concerned about the price decreasing, which would lead their holdings to lose value; they are also less concerned about the price of dyes rising, which would cause them to regret a large purchase in the past.
Someone famously bought two pizzas in 2010 for 10,000 bitcoin, which was roughly thirty dollars at the time and is now worth several million dollars per pizza if they had used 30 Dai instead. Dai, in addition to being a stablecoin, is a decentralized cryptocurrency that runs on the Ethereum network. Being a cryptocurrency confers benefits over cash, including efficient global transfers, programmable transactions, and more. These benefits make Dai a valuable store of value and medium of exchange. What is the purpose of dye? Dai is a stablecoin with the goal of being worth one US dollar, but why would anyone want Dai when they could just use dollars? There are various reasons why someone could like Dai. For one, it is borderless; you can hold die no matter where you live.
For the estimated 1.8 billion people worldwide who do not have access to a bank, this provides a potential way to hold value without a bank account. It also provides a way for people to protect that value if they live in an economy experiencing hyperinflation, which can occur when the government prints so much money that the value of that money falls rapidly.
Second, Dai is programmable; it is controlled by code, which gives it enormous flexibility. For example, if you owned a business that needed to pay a large number of people every day, you could write a smart contract that automatically sends dye to each person for as long as you like, and because it is powered by code and the blockchain, these transfers can take place on Sundays, bank holidays, and even at exact times down to the minute for very low fees, which is not possible with today's banks.
Third, Dai is simple to transmit. Dai may be sent anywhere in the world in a few minutes for a few cents, as opposed to international bank and wire transfers, which can take days or charge exorbitant fees. Dai works on the Ethereum blockchain, making it fast and cheap.
Fourth, because Dai is a cryptocurrency, it can be saved using a mobile wallet app; there is no need to trust a bank or company with your money; you will always have access to your assets, and your account will never be frozen.
Dai is open and transparent. Anyone can read and use the code that powers it, and the mechanism that generates Dai is open to the public and auditable. Dai is collateralized, which means it is backed by other assets. For every Dai, there is over a dollar's worth of cryptocurrency backing it up in a smart contract. This collateral provides Dai with its intrinsic value.
How does dye maintain its stability? Dai is a stable currency with the goal of being worth one US dollar. Let's take a look at Mary. She has ETH and wants to get Dai. She could purchase some on an exchange with her ETH or, if she doesn't want to sell her ETH, she could use it to generate Dai. It works like this: if Mary wants 100 Dai, she can deposit her Ethereum into something called a CDP to generate it. Consider a CDP to be a vault for Mary's collateral; the exact amount of Dai she generates is proportional to the amount of ETH she deposits; a typical ratio is three to one, which means that if she deposits three hundred dollars worth of ETH, she receives one hundred dollars of Dai as soon as she deposits that ETH; in order to get her ETH back, she must return Dai and pay a stability fee.
This basic method generates economic incentives with the goal of keeping Dai at one dollar. The incentives work as follows: if Dai falls below one dollar, Mary can purchase some cheap Dai and use it to obtain her Ethereum back at a bargain; if Dai rises over one dollar, Mary can do the opposite, generating Dai against her ETH and gaining greater purchasing power.
With thousands of Marrys producing and repaying Dai, these economic incentives, together with publicly decided changes to the stability charge, seek to keep the price of Dai at one US dollar. This method is not magical; it is based on logic, economics, and open source code. Today, the Dai creation process is one of the largest decentralized applications in the world, with over 300 million dollars of ETH held in CDPs, and for good reason. Since its launch in 2017, Dai has remained close to one US dollar in value, which is a significant accomplishment in the ever-changing world of decentralized finance.
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