What is DAI

Eric Eissler
| Editor:
March 7, 2023
7 min read

Stable coins have been hot in 2022. However, recently, we saw Tether (USDT) run into issues by not being fully backed by fiat USD reserves to maintain its 1:1 price ratio. This is where Dai (DAI) comes in as being a unique stable coin. It is not backed by traditional assets or fiat currencies. It is backed by other crypto that is put up for collateral to mint the Dai tokens on demand. Confused already? Don't be. We'll cover the background, history, tokenomics, technology and much more, which drives this token forward. So stick with us as we unwrap Dai and its unique capabilities.

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Dai was created by Danish entrepreneur, Rune Christiansen, in 2018. However, before Dai was created, Christiansen created MakerDao which is a Decentralized Autonomous Organization (DAO). MakerDao's purpose is that it functions as an over collateralized loan and repayment system. To get a better grasp on how this works, let's jump right into the tokenomics in the section below.


To be able to get Dai, you need to get it as a loan for 150% of your desired loan value. So if you gave $150 of Ethereum for collateral, you would end up with some 100 Dai. Your 50% is going towards paying into a collateralization. If the collateralization ratio of a loan falls below the minimum ratio, anyone may call a function on the contract to liquidate the loan and receive a percentage of the collateral as a reward.

Consequently, by repaying a loan and its accrued interest, the returned Dai is automatically destroyed and the collateral is made available for withdrawal. In this way the USD value of Dai can be said to be backed by the USD value of the underlying collateral held by MakerDAO's smart contracts. So in this way, it is not only one centralized institution that controls the backing value. That 50% fee is a buffer essentially that protects the price because if it starts to fall, someone can sell the contract and get the balance or collateral fee as a reward for wiping out that contract that was starting to decline. Dai is ERC20 so it will accept Ethereum as payment or collateral, plus other currencies such as, BTC, BTC Wapped, UNI, and according to the website 30 tokens total can be put up for collateral.

Due to its design, the supply of DAI cannot be altered by any party in the network. Rather, it is maintained through a system of smart contracts designed to dynamically respond to changes in the market price of the assets in its contracts.

Maker Protocol, which runs on the Ethereum blockchain, is the software that governs DAI issuance. In order to maintain the soft price peg to the U.S. dollar, Maker Protocol ensures that every DAI token is collateralized by an appropriate amount of other cryptocurrencies. As part of this process, the Protocol allows any user to deposit their crypto into a so-called vault - a smart contract on the Ethereum blockchain - as collateral and mint a corresponding amount of new DAI tokens.

There are 6.5 billion Dai tokens in circulation and total supply. Remember that when the loans are closed the Dai are burned. When new loans are opened, Dai are created, so the system is always balanced.

Historical Price Data

Graph of Dai's historical price data.
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For a stable coin, the price has fluctuated a lot in the beginning but not as much now as before, when it was new and had fewer users. In March of 2020 when Covid was exciting the markets the price shot up $1.09 and fell as low as $0.96. These changes were due to massive Crypto-wide market fluctuations. While there has been more fluctuation than fiat-backed Tether, but by using crypto-based collateral, the Dai tokens are fully backed by an existing value, Rather than unverifiable fiat dollars and other assets that are allegedly backing Tether.

Since this is a stable coin and the price has been relatively stable, there isn't much of a point to getting into a written price analysis, rather than just taking a look at the graph of the price data that is posted above.


The Basis of Dai is running on the Maker Protocol and MakerDAO. These are smart contracts that are coordinating the exchange of crypto collateral for Dai tokens. Dai runs on a layer 2 level on Ethereum so it is compatible with ERC20 tokens.

Atomic Dai Wallet

Atomic Wallet offers you a great place to store your Dai tokens. Besides just being a wallet for storing, sending, and receiving, you can do much, much more with an Atomic wallet. Atomic Wallet has some great features such as having a built-in decentralized exchange/swap where you can buy more than 300 cryptocurrencies and have them securely stored in your Atomic Wallet. What's more is that you can stake a number of tokens right in the Wallet! On top of that, for each transaction you make in Atomic Wallet, buying, selling, or swapping, you are eligible to get up to 1% back per transaction paid out in Atomic Wallet's native token, AWC.


What is a stability fee?

The Stability Fee is the variable annual rate, shown as a percentage, added to your debt that you will need to pay back. This can be seen as the cost to generate Dai, which is paid directly to the Maker Protocol.

What is a Proxy?

A Proxy is a smart contract that allows you to easily interact with supported protocols, including the Maker Protocol, to manage your Vaults, generate Dai and so on. You will only need to do this once per wallet and all your Vaults will be managed through this single Proxy. Please never send any funds to this Proxy address though.

What is an allowance?

Token allowances let you control how much the proxy contract can do with the token balance in your wallet. To allow the Proxy contract to pay back Dai, or interact with the collaterals in your wallet, you will need to authorize it by setting an allowance with each token that you want to use. You can set the allowance to the amount you want to use each time or you can set a higher allowance for future interactions. This will all be presented to you within the flows.

What is the next price?

Within the Maker Protocol, there are always two prices for the collateral, the current price and the next price. To protect the system and users from 'bad actors' and flash crashes, the Maker Protocol uses an 'Oracle Security Module'. This means that all prices that go into the system are delayed by one hour, and only updated once per hour - roughly on the hour. The next price is the price that will come into the system as the 'Current Price'. It is the Current Price that your Vault is always measured against, so you can only be liquidated once the 'Current Price' goes below your 'Liquidation Price'. This also means you have up to one hour to react if there is a big price drop and the next price is below your Liquidation Price.

What is slippage?

Transactions sent to the network may take some time to confirm and because of this trades may execute at a different price than the one expected. Slippage refers to the difference you are willing to accept between the quoted price and the execution prices due to differences in market conditions during transaction confirmation.


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