What is DAI ( MakerDAO – MKR) and Why do we Need It?
DeFi, General, Stablecoins - August 25, 2020
One of the most important stablecoins is DAI by Maker DAO. MakerDAO is a decentralized autonomous organization or DAO which made the DAI stablecoin backed by crypto. In this video we breakdown what DAI is and why we need it.
There are two types of stablecoins. Firstly, stablecoins backed by fiat or real world currencies like USDT, USDC, GUSD and more. Secondly, stablecoins backed by cryptocurrencies. The main stablecoin is the second category is DAI by Maker DAO.
DAI runs on the Ethereum blockchain. It is an ERC-20 token. DAI is backed by Ether, or ETH the main cryptocurrency of Ethereum. The collateralization ratio is 150%. This means that for every DAI, there are 1.5 ETH backing it. This is done so that the price of DAI does not change, it remains equal to $1.
The Maker DAO allows users to lock up their ETH for DAI in the 150% ratio. Users would want to lock up their ETH for DAI if they need to make a long term transaction. Say for instance, you have to pay someone for some work in a one month time frame. You can lock up the ETH to pay them in one month’s time. But since ETH is volatile, its price might not be the same in one month as it is now. The solution to this is to lock up your ETH for DAI.
MakerDAO allows this by taking custody of ETH and giving out DAI. The DAI can be used to pay for the work. Once the user deposits the same number of DAI taken, they will receive their ETH back. Through this, Maker DAO is creating a stablecoin with cryptocurrencies.
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