Lesson 2: What is the stablecoin DAI?

Let's understand the overview of Dai

Dai is a cryptocurrency issued and managed by MakerDAO.

The price of Dai is always linked to the US dollar and is adjusted so that 1Dai = 1USD.

Until October 2019, Dai used Ether (ETH) as its price backing asset.

This means that a certain amount of Ether was used as collateral to maintain that 1Dai=1USD.

Starting in November 2019, Basic Attention Token (BAT) was added to the price backing assets.

Having multiple backing assets will make the price of Dai more stable.

This change is very important for understanding MakerDAO, so be sure to learn the details in Lesson 6.

What is a stablecoin?

Dai is classified as a type of stablecoin among the many cryptocurrencies.

A stablecoin is literally a cryptocurrency whose price does not fluctuate much.

As we learned in the cryptocurrency curriculum, fiat currencies such as the dollar and euro are viable because they fulfill three roles as currencies: a means of exchanging value, a measure of value, and a store of value.

Bitcoin and other conventional cryptocurrencies have a great deal of speculative demand.

As a result, the volatility of the value that cryptocurrencies have has become very large, and they have not been able to satisfy the "store of value".

As a result, the use of cryptocurrencies in situations such as savings, remittances, and payments is not suitable, creating a challenge that makes it difficult for them to spread to ordinary consumers.

Stablecoin has been developed to solve this problem as a mechanism to minimize price volatility as much as possible by backing its value with other currencies and assets.

This is expected to give cryptocurrencies the role of "store of value" and make them popular as currencies.

Types of Stablecoins

There are three main types of stablecoins: fiat currency-backed, cryptocurrency-backed, and unsecured.

Let's take a look at the characteristics of each type.

Secured by fiat currency

By backing the value with fiat money such as dollars or euros, the price of the currency is stabilized.

The advantage of this type of currency is that it can be exchanged for fiat money at any time, but trust in the custodian is required.

Cryptocurrency collateral type

The cryptocurrency collateral type stabilizes the price of the currency by backing its value with other cryptocurrencies such as Bitcoin and Ethereum.

As with the fiat currency collateralized type, the advantage is that the collateralized cryptocurrency can be exchanged at any time, but the issue remains that the price of the underlying cryptocurrency may fluctuate.

Unsecured type

The unsecured type has no assets backing its value, and uses smart contracts to adjust the amount of currency issued.

The advantage of this type of currency is that it is not influenced by a specific administrator since there are no assets backing it.

This unsecured stablecoin is the most ideal currency because it uses the same mechanism as fiat money to stabilize the price of the currency.

Of these, Dai, issued by MakerDAO, is a cryptocurrency-backed type.

Advantages of Dai

Now let's learn about the advantages of Dai as a stablecoin.

The biggest advantage is that it literally has less price volatility.

It is more suitable for remittances and payments than Bitcoin and Ethereum, and is also an excellent target for deposits.

Therefore, when the price of cryptocurrencies fluctuates sharply, there are examples of people temporarily transferring their assets to Dai.

Secondly, it is borderless.

Borderless means that there are no boundaries or borders.

There are fiat currencies that can be used within a certain region, such as the Euro, but there is no currency that can be used in all countries.

Therefore, when using the currency of another country, it is necessary to exchange money, which incurs a lot of time costs and fees.

On the other hand, stablecoins and other cryptocurrencies can be used anywhere in the world, so there is no need to exchange money.

Therefore, they can be used for money transfers and settlements in a shorter time and at a lower cost than fiat currencies.

There are also many other advantages such as high transparency through the use of blockchain.

Dai and other stablecoins are a new mechanism that solves the disadvantages of both fiat money and cryptocurrency.