It is a well-established fact that cryptocurrencies are volatile, i.e. really unstable. If we follow a common definition of currency, it means something traded in exchange for goods or services.
Speaking of crypto, is it possible to trade it like you do traditional currency? It is possible. Still, you might not want to do this by looking at the volatility rate of cryptocurrencies like bitcoin, which can show a drop of more than 10% in just one day.
This is where stablecoins come in to reduce the shortcomings of cryptocurrency by keeping its usability relevant. In layman’s terms, stablecoins are those cryptocurrencies that are backed by fiat currencies such as fiat currencies, gold, price indices, or other stable assets. However, they are mostly pegged to currencies like US Dollars, Euros or Pounds etc.
Unlike traditional cryptocurrencies, stablecoins have low volatility. To date, there are over 30 stablecoins, most of which are backed by the US dollar. For example, stablecoin DAI is pegged to $1. It’s price won’t go very far over the dollar since that’s how it’s designed and engineered.
As mentioned, there are now more than 30 stablecoins on the market. These include Terra (USDT), USD Coins (USDC), Binance USD (BUSD), Dai (DAI) and many more. But here we will dive deep into the DAI stablecoin. It works and use cases are popular with the stablecoins; Why is it and how is it becoming so popular, is it worth it, will it continue the trend and how far can it go?
Let’s find out –
Creation and launch of DAI
The members of the Maker team launched dai in 2017. MakerDAO, as the name suggests, is a decentralized autonomous organization built on top of the Ethereum blockchain network. Development of decentralized stablecoins whose value is tied to an asset. In that regard, they have Maker (MKR) and Dai (SDAI), both tokens being ERC-20 tokens.
And it might be more than clear by now that Dai is a decentralized stablecoin since it is powered by a DAO, as opposed to a centralized stablecoin like Tether (USDT).
Every time someone takes out a loan on MakerDAO, DAI is generated, and when loans are repaid, the DAI token is destroyed according to its smart contract.
To get a DAI token, the simple action is to take out a loan on MakerDAO’s Oasis platform. After that, the generated DAI can be traded on the same platform and other exchanges like Coinbase etc.
What Makes DAI Stablecoin Unique?
So far it is clear that the stablecoins hold their value to remain close to or at $1. In this regard, other stablecoins use a mechanism where each central authority holds an equal dollar amount in Tether’s account against each USDT to back the stablecoin. But this is where DAI made the difference.
It uses the mechanism of smart contracts designed to run automatically and keep the value of DAI at one dollar. For example, when the DAI price fluctuates and is far from a dollar, a smart contract is automatically initiated. It will start burning or creating Maker (MKR) tokens until DAI price stabilizes.
Where Tether or other stablecoins needed some intermediaries to keep adding the currency to keep the currency stable, MakerDAO doesn’t have to. Its algorithm manages the price of DAI itself, so you don’t have to trust anyone in this regard.
The system goes both ways as intended to work and if the DAI equals its value to the US dollar then MKR token holders have profit. If the price falls below the dollar, more tokens will be generated.
On the other hand, if the token price rises above a dollar, MKR will start burning, making it scarcer and ultimately more valuable. The DAI has kept its value constantly pegged to one dollar for over three years after the smart contract.
DAI has these other specs
So, we have gone through the work of DAI stablecoin. Because it is simply a token based on the open network Ethereum blockchain, this means that it is available for anyone to use or create with DAI without asking for permission.
DAI is an ERC20 token, so it acts as an important factor used to be integrated into any decentralized application (dapp) that needs a payment system or a stable asset.
Since the token is available on open source, it can also be packaged into various smart contracts by developers and modified according to usage. For example, Chai and rDAI take traditional DAI and put it in an interest-generating pool. Then users can control the accrued interest.
Use cases of DAI
Since currency is meant to be valued in terms of its purchasing or purchasing power, cryptocurrency follows from this. However, digital assets have become more of an investment opportunity than being used as currency. So, following tradition, where does the use case of stablecoin like DAI stand?
One of the main uses of DAI stablecoin is to hold it as a stable hedge or counterbalance against the volatility of other more popular and valuable crypto assets like Bitcoin or Ethereum. The stability of DAI token mostly proves to be good for traders or investors with bearish streaks who are waiting and believing that the market is going down.
TO TRADE
From a trading perspective, DAI is said to be one of the ideal crypto assets to spend as many exchanges allow users to convert their fiat currency into crypto-like DAI and vice versa. It can be thought of as a savings account where your money can be safely invested.
TO INVEST
Yes, stablecoins may not bring huge profits to the crypto users like other cryptocurrencies like bitcoin, ethereum, etc. do as they surge up or down by up to 10% in a day. However, stablecoins can be a safe investment with minimal risk.
For example, it is designed to track the value of the dollar and rarely shows large fluctuations. So, the DAI drops from $1 to $0.95, or 95 cents, allowing a crypto user to buy the stablecoin and put it in their wallet. As it runs on smart contracts and algorithms, it starts working to bring its value back to $1. When it happens you have a sweet 5% win.
Holding a token further until its price rises to $1.5 can bring the user more profit if they so desire. Otherwise it would be in profit anyway because it has to be $1.
What does DAI own and where can it go?
MakerDAO aims to make the token the most prominent unbiased currency about the developers behind DAI. The goal they presented at the beginning is also reflected in their logo, which symbolizes dollars ($), euros (€) and pounds (£).
Predicting the price of a stablecoin is meaningless as it will not go far from $1. However, its adoption and possession will be beneficial as its adoption and daily use cases increase and will be used by millions of people in the future. The way things are going, if cryptocurrencies are to be used as a medium of exchange for practical purposes, it is more than obvious that stablecoins would be a priority. Among all possibilities, DAI would be preferable.
Steve Anderson is an Australian crypto enthusiast. He has been a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralization and understanding the true potential of blockchain.
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