Hi Publish0x community! Welcome back in this new article of my “Easy & Short Cryptocurrencies Made Accessible” area.
In this article we talk about more features of DAI!
In the last E&S article I introduced you Dai (DAI) and I said that is an ERC-20 token that is designed to function as a stablecoin or stable currency whose value is pegged to the dollar. This currency is issued in a decentralized manner through the collateralization of collateral that serves to always guarantee its issuance. The currency and the entire protocol that supports its operation were designed by MakerDAO, one of the projects with the longest history in the ecosystem.
Now, what goals really led to the creation of DAI?
In response to this we can say that the main objective was to create a safe medium to store value. As we know, coins like BTC and ETH, suffer from high volatility given the period of industry growth we are in. This volatility is not a problem in economic systems that seek to generate profits by exploiting this feature. But in use cases such as loans, savings or money transfer platforms, this volatility is counterproductive and even undesirable.
Faced with this situation, DAI proposes a solution. Thanks to a collateral system, DAI can be generated with a 1:1 value against the dollar used highly volatile cryptocurrencies. In this way, the generated coins can be used to make fixed and stable value transactions on other platforms, with the assurance that said coins are secured by a deposit. Therefore, regardless of whether the value of cryptocurrencies goes up or down, the value generated will always be the same and, in the worst-case scenario, there are guarantees to avoid loss of value.
Undoubtedly a novel idea that allows us to develop new features that leverage the potential of blockchain. Especially those that need a stable and decentralized medium of value exchange. A medium that can be freely exchanged and repurposed seamlessly, in the last case needed to recover the value of your collateral. At this point DAI meets these needs and opens the door to such developments. Indeed, thanks to DAI, your holders can get a steady return on their holdings. And this is all thanks to collateralization, the creation of autonomous feedback mechanisms, and external actors duly incentivized to maintain the dynamism of the system.
DAI is the key building block for generating a robust and functional decentralized lending platform on the Ethereum blockchain. And this has certainly helped the DeFi ecosystem grow the way it has grown.
Image source: https://makerdao.com/en/
Pros and cons of DAI
Some of the pros we can find in this currency include:
- It is a secure and decentralized stablecoin with a long history of security.
- It is not dependent on banks, being a completely different stablecoin from USDT. In other words, there is no constant risk that the bank will close or take possession of the account that supports the entire protocol, nor is it necessary to trust that these funds exist in the bank.
- It facilitates the creation of decentralized means of exchange and financing. In fact, DAI is one of the most widely accepted currencies in the DeFi and DEX world at present.
- Its proven stability system generates confidence in its operation. Even in the worst scenarios, MakerDAO has been able to maintain stability at acceptable values and, in fact, has improved stability over time.
- It is easily accessible and respects the privacy of its users. Anyone can access the system without KYC or providing your data to a third party.
- Ability to generate credit and interest for that credit, making it a powerful option for investing.
- It is a widely supported stablecoin in many exchanges.
However, on the negative side we can mention:
- It is a bit complex on a technical level, which makes access a bit difficult for people who are just starting out in the DeFi world.
- The limited variety of currencies as collateral is seen as a system problem. In fact, tokens such as Compound or YFI are not yet accepted as collateral, while MANA (a token with less scope) is.
- There are risks involved in using Maker Vault. Remember that to generate DAI you must transfer ownership of your assets to a smart contract that can sell your assets if the mercado declines. Any deposit with DAI generated has a liquidation price, the price of the underlying asset at which the deposit would be liquidated. Using a vault for leverage represents additional risk. The potential for reward is increased through leverage, but the potential for loss is also amplified. It is common practice among users to maintain a high collateral ratio to protect against market risk and thus liquidation.
- A smart contract is transparent and immutable, but it can be breached. Nothing guarantees that it cannot happen like the famous hack of the DAO.
Have you already used DAI into DeFi?
Next Sunday I’ll introduce to you a new cryptocurrency.
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