Dai Coin Guide 2018

/Dai Coin Guide 2018

Dai Coin Guide 2018 2018-07-03T13:41:19+00:00
Dai Coin Guide 2018

Quick inner navigation:

  1. What is Dai?
  2. Pros of Dai Coin
  3. What is Maker (MKR)?
  4. How Dai Works?
  5. What Makes Dai Special from Other Stablecoins?

Dai Coin Review & Guide 2018

The crypto community is continuously carrying out research and development to develop the most viable crypto that can effectively replace the old and limit fiat system. To achieve this milestone, the community will have to design a coin and a system that ordinary people can use without the need of being tech savvy. The particular coin must be scalable, stable and easy to use. It is these features that have sustained fiat currencies for centuries.

Since the crypto community wants a system in which peer-to-peer trading will be possible eliminating the controlling intermediaries that often make transactions expensive, then they will have to come up with an ingenious idea. Bitcoin attempted and seems to be failing, but Dai coin, a decentralized stable coin based on the Ethereum blockchain, seems to be making amends where its predecessor seems to have failed. In this article, we will learn about all what Dai is and if it is a viable contender to be a mainstream currency.

What is Dai?

Dai is a decentralized stablecoin developed by the Maker company. This coin was developed in December 2017. The coin is an Ethereum ERC20 token that uses smart contracts. It is pegged to the actual value of the US dollar at any one point in time. Dai will always be $1 for as long as it is in existence. That means that if it is accepted in the mainstream financial system, then it will simply replace the fiat currency’s value at the time but now operating as a digital currency. If you buy Dai coins worth $1000, your coins will still be worth $1000 in ten years. That is why it is called a stable coin. Its worth is not affected by the market forces of supply and demand that affect other digital coins.

Dai coin is a bit different and unique from other stablecoins. Stablecoins like Tether (USDT) are backed by a reserve that always holds the equivalent amount of fiat currency of the USDT coins in circulation making this coin centralized. Dai has no backup reserve bank. It is completely decentralized.

Dai coin aims to solve the challenges associated with cryptocurrencies such as volatility, transaction fees and the speed of transactions. Processing payments using this coin is free and instant. Its price is always pegged to the value of $1 so there is no need to worry about volatility. It also seeks to eliminate the need of having a central authority controlling the system or a third-party acting as an intermediary when peers are transacting.

Pros of Dai Coin

  • It is not volatile. The price of one Dai coin will always be $1. There are no price fluctuations.
  • Dai is exchanged without the need for a middleman.
  • It is completely decentralized with no single entity controlling it.
  • It can never be shut down by anyone.
  • You can accept and transfer Dai to any Ethereum wallet provided you also have one.
  • Transferring USD (Dai) is free and instant. The only cost is the Ethereum gas fees.
  • Payments are processed directly in the same manner people use fiat currencies.

What is Maker (MKR)?

The Maker or MKR is the company behind the Dai stablecoin. It is among the pioneers to establish their platform on the Ethereum blockchain. This company began working on the Dai project even before Ethereum platform came into existence. Ethereum founder and developer Vitalik Buterin supports and backs this project fully.

Maker provides the platforming which Dai coin operates. Being a Decentralized Autonomous Organization (DAO) it allows holders of the MKR token to vote in the system. These holders make decisions that affect debt ratio limits or even close down the entire system if it is attacked.

Secondly, when paying a Dai loan, one is required to pay an interest of 1% that is payable in MKR. The MKR paid as interest is usually destroyed increasing the value of MKR over time. MKR token can be divided up to 18 decimal places which can be increased with time. This allows the system to trade up to $1 quadrillion without the fear that MKR will fizzle out.

How Dai Works?

Like stated earlier, Dai works differently from other stablecoins. Most stable coins have a backup system in which funds are held equivalent to the coins in circulation. It is less like a reserve bank. These coins are called IOU coins or legally-backed crypto. The coins are forever at the mercy of the reserve institution. This backup system defeats the essence of decentralization.

Dai, on the other hand, is entirely based on the blockchain and completely decentralized. It is not backed up by any reserve institution meaning that it can never be hacked and your coins will always remain safely with you. The Dai system utilizes a balancing mechanism to always keep the value of one coin at $1. Considering that this price remains stable, users will never have the need of mining this coin. They can simply acquire it from the exchanges and carry out their transactions.

If you have ether holdings, you can use MakerDAO to take Dai loans from the Ethereum blockchain. the first step in this process is to turn ETH into “wrapped ETH” (WETH) tokenizing ETH to be used like any other ERC20 token. You then turn the WETH into a “pooled ETH” (PETH). Your token joins a large pool of Ethereum to act as collateral for all the Dai created. The next step involves creating a “collateralized debt position” (CDP) locking up your PETH and allowing you to draw Dai against this collateral. The more Dai you draw, the higher the debt ratio increases. There is a limit though to which you can draw against your collateral. You can then spend your Dai like any other ERC20 token.

Creating Dao gives an incentive to the system developers to continue managing the system. Dai sometimes goes just above the $1 mark. It is this gaps that Dai creators seek to utilize to earn some free money. But how does Dai work to keep its Dai price at $1?

The system works following the factors of supply and demand. When Dai demand is high, its price goes slightly above the $1 mark. This position encourages the Dai community to create more coins to profit from the increase in price. Creating more Dai increases its supply and eventually collapses its price back to $1 or less. If it goes lower, the community then buys the coins to spur its demand hoping to profit from the difference in price. This position then pushes the coin back to $1. It is a kind of an equilibrium cycle that keeps the coin always at $1 with very slight variations.

The price of ETH to USD derives from the oracles in the Maker system.

What Makes Dai Special from Other Stablecoins?

Apart from being a stablecoin like the rest, Dai has gone a notch higher. Having nothing like a bank to back it up makes it special since no one anywhere in the world can shut it down. It is completely under the users’ control of the Ethereum blockchain. Having no central authority, users can transfer USD (Dai) across regions instantly without any fees other than the Ethereum gas fee. Tether USD or TUSD is not decentralized as Dai and is vulnerable since the controlling authorities can shut it down.

USDT is based on the bitcoin blockchain and its dollar equivalent reserves are held by Tether Limited. These dollars can be redeemed via the Tether platform. The downside of this system is that there is a controlling or a third-party authority that the crypto industry is trying to eliminate. With Dai, there is no intermediary. Users trade directly without having to deposit anything in any reserve. The banks used by USDT to receive and transfer the dollar equivalent when a user wants to convert their USDT tokens can manipulate this system making the tokens valueless.

Tether’s claim to have an equivalent amount of dollars in their reserves might be a sham since retail clients have not deposited the claimed amount. With Dai, no one lies to you about any reserves, you get the coins and have faith within the community that others will also accept it as a currency. It follows the same system in which fiat currency is no longer backed up by gold reserves, but with the confidence of the people.

Dai, being a stablecoin is just what it is. Users no longer have to worry about its volatility as in the case with other cryptos. If you receive 21 Dai now for a product, you will rest easy knowing that your currency will not suddenly lose value overnight when you are sleeping and wake up with nothing.

Summary

Dai seems to have a promising future. In addition to being a digital currency, it has most of the other attributes required of a mainstream currency. It is not volatile and its possible to process transactions instantly free of charge. Topping on all of these qualities, it is decentralized, the core aim of all cryptos. If the creators can convince ordinary people to take up the currency, it would eventually be the one to replace fiat currency. However, this is a wait and see game.

Thank you for taking your time to go through this article. We will endeavor to keep you informed on everything crypto, so keep checking our site for more.

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