Dai

Introduction to Dai

Dai represents one of crypto’s most important experiments: a stablecoin that maintains its dollar peg through smart contracts and economic incentives rather than bank reserves. Created by MakerDAO, Dai pioneered the concept of collateralized debt positions (CDPs) and demonstrated that decentralized money could be stable.

Unlike USDC or USDT, which hold dollar reserves, Dai is generated when users lock cryptocurrency as collateral. This over-collateralized model ensures solvency without trusting custodians, making Dai a cornerstone of the DeFi ecosystem and a proof point for decentralized finance.

How Dai Works

Collateralized Debt Positions

Vault mechanics:

• Deposit collateral (ETH, etc.)
• Generate Dai against it
• Maintain collateralization ratio
• Pay stability fee (interest)

Over-Collateralization

Safety buffer:

• Typically 150%+ collateral required
• Liquidation if ratio falls
• Keepers maintain health
• Protocol captures value

Stability Mechanisms

Peg maintenance:

• Dai Savings Rate (DSR)
• Stability fees adjustment
• Liquidations
• PSM (Peg Stability Module)

Technical Specifications

Metric	Value
Token Standard	ERC-20
Peg Target	$1.00 USD
Collateral Types	20+ assets
Minimum Ratio	Varies by asset
Governance	MKR token

Dai vs. Other Stablecoins

Comparison

Feature	Dai	USDC	USDT
Backing	Crypto	USD reserves	Mixed reserves
Custody	Smart contracts	Circle	Tether
Transparency	On-chain	Audited	Limited
Censorship	Resistant	Possible	Possible

Dai’s Trade-offs

Strengths and weaknesses:

• More decentralized but less capital efficient
• Transparent but complex
• Censorship-resistant but liquidation risk
• Permissionless but harder to scale

The MakerDAO System

Governance

Decision making:

• MKR token governance voting
• Parameter adjustments
• Collateral onboarding
• Protocol upgrades

Risk Management

System safety:

• Collateral risk assessment
• Debt ceiling limits
• Oracle security
• Emergency shutdown

Revenue Model

Protocol economics:

• Stability fees (borrowing interest)
• Liquidation penalties
• Protocol surplus
• MKR buyback/burn

Evolution of Dai

Single-Collateral Dai (Sai)

Original version:

• ETH-only collateral
• Simpler mechanism
• Launched 2017
• Migrated to Multi-Collateral

Multi-Collateral Dai

Current system:

• Multiple collateral types
• More complex governance
• Greater flexibility
• Increased risk management

Real-World Assets

Expansion:

• Tokenized treasuries
• Real estate backing
• Traditional finance assets
• Controversy over centralization

Dai Savings Rate (DSR)

Yield Generation

Earning on Dai:

• Deposit Dai in DSR contract
• Earn interest from protocol
• Variable rate (governance set)
• Key monetary policy tool

sDAI Token

Wrapped version:

• Yield-bearing Dai
• Composable in DeFi
• Automatic compounding
• ERC-4626 vault standard

Peg Stability Module (PSM)

Direct Conversion

Arbitrage mechanism:

• Swap USDC/Dai 1:1
• Maintains tight peg
• Reduces volatility
• Trade-off: centralization

Centralization Concerns

USDC exposure:

• Significant PSM usage
• Circle dependency
• Regulatory transmission
• Ongoing debates

Maker’s Endgame

Strategic Evolution

Long-term plan:

• SubDAO structure
• Multiple stablecoins
• Governance reform
• Sustainable growth

NewStable and PureDai

Proposed split:

• RWA-backed stablecoin
• Pure crypto-only version
• Different risk profiles
• User choice

Challenges and Criticism

Centralization Creep

Growing concerns:

• RWA collateral dependency
• USDC exposure via PSM
• Governance concentration
• Regulatory pressure

Complexity

System opacity:

• Many parameters
• Difficult to understand
• Governance burden
• Risk assessment challenges

Competition

Stablecoin market:

• Centralized options simpler
• New decentralized attempts
• Yield competition
• Market share pressure

Recent Developments

Sky Protocol Rebrand

Major changes:

• MakerDAO becoming Sky
• USDS stablecoin launch
• SKY governance token
• Ecosystem restructuring

RWA Growth

Real-world asset expansion:

• Treasury bill backing
• Institutional partnerships
• Revenue diversification
• Controversy over direction

Future Roadmap

Development priorities:

• Endgame Execution: SubDAO implementation
• Decentralization: Reduce centralized collateral
• Scaling: L2 deployment
• Products: New stablecoin variants
• Governance: Structural reforms

Conclusion

Dai proved that decentralized stablecoins are possible, maintaining its peg through multiple market cycles and crises. The MakerDAO system inspired countless DeFi innovations and remains one of the most battle-tested protocols in crypto.

However, the tension between decentralization ideals and practical scaling pressures continues. The increasing reliance on real-world assets and centralized stablecoins in the PSM challenges Dai’s original ethos, even as they improve capital efficiency.

For users seeking a stablecoin with transparent, on-chain collateral and censorship resistance, Dai remains the primary option—though understanding its complexity and trade-offs is essential for informed usage.