Is it worth investing in DAI?

Asked 2 years ago

Hi, I'm wondering how safe it is to invest in DAI and whether it is a good stablecoin to go for.

Wilbur Padilla

Tuesday, June 07, 2022

No cryptocurrency is 100% risk-free, and this also applies to stablecoins. DAI is, however, a reliable as the project has stood the test of times. Here are the crucial points you need to know: DAI is a crypto-collateralized stablecoin and at the time of writing, the second largest protocol only behind the Curve project in total value locked (TVL). The protocol consist of two tokens the MKR which is the governance token of the Maker DAO (decentralized autonomous organization), and DAI the stablecoin issued to borrowers from the Maker DAO protocol.

Although you can buy both MKR and DAI on exchanges, each DAI token is backed by a minimum of 150%-175% by Ethereum and other ERC20 tokens. The backing is meant to maintain the stability of DAI and its 1:1 ratio peg to the US dollar and protect the smart contracts from the volatility of the collateral assets. When the debt is paid back to the protocol, it attracts an interest of 0.5% of the amount borrowed which is paid in MKR. The DAI borrowed is burned out of circulation or sent to a send_to_only_address from where it can never come back into circulation. If the value of the collateral falls below 150%, the debt is liquidated and a 13% penalty fee is charged by the protocol.

When the price of DAI goes above a dollar, the protocol increases the interest rate, reducing the quantity of DAI in circulation to keep the peg and when the price fall below a dollar, the interest rate is decreased to increase DAI supply.

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