MakerDAO (MKR) is a cutting-edge open financial system that issues Dai stablecoins backed by crypto assets. Aave, Compound, and Uniswap, among other DeFi platforms, now use Dai decentralized stablecoins.
Stablecoins are pretty much identical to digital dollars in that they have a generally constant value that does not fluctuate from day today. Stablecoins are popular among crypto investors because, unlike fluctuating cryptocurrencies, they provide a safe location to keep your money at a 1:1 value.
Centralized vs. Decentralized Stablecoins
Stablecoins like USDT, USDC, GUSD, and PAX are not just pegged to the US currency but also backed by US dollar reserves. A vault of real money and valuables back every stablecoin.
USDT, USDC, and the other primary dollar-backed stablecoins are all printed by centralized entities, similar to central banks. Auditing, accounting, and governing stablecoins like Tether require a great deal of third-party monitoring.
These virtual dollar stablecoins are certainly not what you seek if you are concerned about decentralization. MakerDAO has created a decentralized stablecoin system, which is exactly what you’re looking for.
What is DAI MakerDAO?
MakerDAO is a decentralized bank with a vision for the future that issues stablecoins backed by other digital assets. Smart contracts regulate the network, which runs on the Ethereum blockchain.
Maker-issued Dai stablecoins are dollar-pegged, whilst other stablecoins are dollar-backed. The Maker protocol tracks and pegs the price of DAI to USD in real-time using an oracle.
The Vault system is where Maker’s true unique ingredients can be located. A Maker Vault is essentially where the collateral you’ve invested is used to construct Dai. Because all transactions occur on the Ethereum blockchain, they are decentralized and completely auditable.
When you place collateral in Maker, you open a Vault position at the same time. As a result, you’ll be able to receive Dai stablecoins in exchange for your collateral. The Dai tokens produced add to the global circulating supply once you withdraw.
The Dai sum tied to your Vault position burns and withdraws from the supply when you pay back.
The supply of Dai tokens is flexible since Maker Vaults produce and erase them. The availability of Dai tokens rises and falls in the very same way that a rubber band does. The rationale for this elasticity is to keep the token’s dollar peg.
Maker Vaults requires you to overcollateralize your stake by at least 150 percent in order to protect both itself and you. Assume you hold ETH as collateral, and ETH is currently trading at $2,000 per unit. 2.25 ETH needs to obtain a 3,000 Dai stablecoin loan.
The purpose of overcollateralizing in this way is to avoid liquidation. Lenders liquidate your security to reimburse themselves when the price of your collateral falls below the loan’s value. Maker, on the other hand, requires a lot of padding to keep Dai solvent since it employs risky cryptocurrency as collateral.
You can utilize your Dai stable currency like ordinary cash after establishing a Maker Vault position. Dai is one of the most well-known stablecoins on the market, making it simple to buy more cryptocurrency with your existing assets.
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