Dai is an ERC-20 compliant token created by the Maker company with the objective of having an Ethereum-based digital asset pegged to the value of $1. The DAI platform is hosted in the Ethereum ecosystem through the use of Smart Contracts. DAI is completely decentralized and its value is not backed by dollars from any institution, this grants DAI all the security perks lacking in heavily centralized alternatives like the Tether platform (which is also ‘tethered’ to the USD).
How Dai Works
By using DAI, merchants can access all the benefits of cryptocurrency and blockchain technology without worrying about price volatility. DAI allows businesses to process payments directly as if they were being made with cash. This completely removes any interference or fees commonly associated with the intervention of payment processors acting as middlemen.
Essentially, DAI Tokens are loans made against Ethereum. Through the use of the MakerDAO DApp, advanced users can “create” DAI Tokens by taking loans in DAI against their ETH balance. The system depends on an “ERC-20 wrapping” that tokenizes users´ ETH holdings, which allows them to be used as any other ERC-20 compliant token. DAI Tokens can be held using any ERC-20 compliant wallet like MyEtherWallet.
In a more technical sense, this “wrapped ETH” or “WETH” is secondarily converted into “pooled ETH” or “PETH”, which is the collateral used for all available DAI. Users who possess PETH can generate a “collateralized debt position” or “CDP”, which puts your PETH aside in storage and allows you to use it as collateral to draw DAI against. Once the DAI Tokens are received, they can be used and spent like any other ERC-20 Token.
Besides being created through the described process, DAI Tokens can also be obtained through cryptocurrency exchange platforms such as OasisDEX, Radar Delay, Gate.io, Kyber Network, Ethfinex, and Gatecoin.
The price fixing mechanism of DAI is dependent on very attractive economic incentives that the platform offers to its users. When the price of DAI Tokens is below the $1 threshold, users who took loans against their ETH can pay down their debt at a lower price, which increases the number of purchases, driving the DAI price up. Once the $1 threshold is surpassed, users of the platform have the incentive to “create” DAI and put it up for sale, since it would pretty much be “free money”.
This ebb and flow of supply and demand is the mechanism that ensures that the price of DAI Tokens remains pegged to the $1 value.