Cryptocurrencies can be a useful tool for investing, as a decentralised governance platform, and as a transactional currency.
The global cryptocurrency market is volatile, however, especially when compared to traditional asset markets and fiat currency.
To use cryptocurrency as an effective transactional currency in the current market, you must use a token which is pegged to the value of a stable fiat currency.
This is where Dai comes in.
MakerDAO recently launched its tethered currency Dai, which is pegged to the US dollar.
The token is built on the Ethereum blockchain as an ERC-20 token and was implemented on the main network in December 2017.
MakerDAO uses its Dai Stablecoin System to ensure the price of Dai does not vary outside of acceptable norms in relation to the dollar.
Each Dai token is backed by an amount of Ethereum, which varies depending on the value of Dai in relation to the dollar.
This means that as the value of Dai increases in relation to the dollar, an increasing amount of downward pressure will be applied via the manipulation of its backing currency – returning it to normal.
This process is governed by MKR token holders.
The MKR token (also built on Ethereum) is a governance token which allows holders to vote on the risk management and business logic of the Maker system.
Dai’s collateral system can be threatened due to extremely sharp Ethereum price drops combined with bad governance, resulting in part of the collateral portfolio becoming undercollateralised.
When this happens, automatic recapitalisation of the collateralised debt position is conducted through forced MKR dilution, meaning MKR holders are held accountable for their governance.
The underlying mechanics of the system are extremely complex, and more information is available on the MakerDAO website.
Dai is still in its infancy as a cryptocurrency, but it has already proven its use.
From 15-18 January, the entire cryptocurrency market plummeted by around 30% – sending investors into a panic.
While still relatively weak due to a lack of users and collateral, Dai managed to hold out against the dip, staying within 4% of the US dollar value through the period.
Early issues have affected the system, however, including a brief period on 11 January where the token dipped below $0.80 before returning to normal.
As Dai is still in development, its underlying technologies and governance systems are expected to improve over time.
A strong, dollar-tethered token with provable collateral can be a great asset in the world of cryptocurrency, especially considering the token is built on the Ethereum blockchain.
This means Ethereum holders can purchase Dai tokens without using an exchange.
Dai is not the biggest “dollar-pegged” cryptocurrency on the market at the moment – that title belongs to the Tether token.
Tether is run on its own blockchain and is reportedly backed by real US dollars held by the Tether company.
This claim has come under fire, however, as Tether and its allied company Bitfinex have refused an audit of the company’s assets to determine whether it has backed every token with a physical US dollar.
Criticism has been levelled against Tether for its minting practices, relationship with Bitfinex, and ability to manipulate the global cryptocurrency market.
Dai does not face this problem, as it uses the trustless security of the Ethereum blockchain to prove its collateral value.
The Dai system is written on the Ethereum blockchain using smart contracts, making it transparent and accessible to users.
This also means that holders will be able to redeem their collateral at any time, regardless of censorship or interference.
MakerDAO still has a long way to go until Dai becomes a secure alternative to fiat currency, but it has already made great strides.
This article is not intended as investment advice. Always do your own research before investing in any cryptocurrency.