// GLOSSARY -- BLOCKCHAIN & CRYPTO FUNDAMENTALS

What is DAI?

1 min read Updated

DAI is a decentralized stablecoin pegged to the US dollar, maintained through overcollateralized vaults on MakerDAO — notable for being backed by crypto assets rather than fiat reserves.

WHY IT MATTERS

DAI is DeFi's original decentralized stablecoin. Unlike USDC (backed by cash in a bank), DAI is backed by crypto assets locked in MakerDAO vaults. Users deposit ETH, WBTC, or other collateral and mint DAI against it.

The peg is maintained through: overcollateralization (more collateral value than DAI minted), stability fees (interest on minted DAI), and the DAI Savings Rate (DSR, incentivizing DAI holding). Liquidation of undercollateralized vaults protects the system.

DAI's significance is philosophical as much as practical — it demonstrates that a stable, dollar-pegged currency can exist without any fiat backing or centralized issuer.

FREQUENTLY ASKED QUESTIONS

Is DAI truly decentralized?
More than USDC/USDT, but not fully. Some DAI collateral types (USDC in PSM) are centralized. The MakerDAO governance has concentrated voting power. It's the most decentralized major stablecoin.
How does DAI maintain its $1 peg?
If DAI > $1: minting becomes attractive (mint DAI, sell for >$1, profit). If DAI < $1: repaying becomes attractive (buy DAI cheap, repay debt). These arbitrage forces maintain the peg.
What is the DAI Savings Rate?
An interest rate earned by depositing DAI in the DSR contract. Currently variable (often 5-15%), funded by stability fees from vault holders. It's like a savings account for DAI.

FURTHER READING

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