What Is DAI?

And how it works.

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By Donald McIntyre

October 5th, 2022

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Educational post: We explain what is DAI by MakerDAO.

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DAI, symbol $DAI, is a US dollar based collateralized stablecoin created by MakerDAO, which is a decentralized organization inside Ethereum, that is held and transferred on Ethereum only.

A collateralized stablecoin is an ERC-20 token inside a blockchain, in this case Ethereum, that is pegged to a national or fiat currency such as the US dollar, but instead of having dollars in a bank account to back them, they are backed by crypto assets.

The $DAI token is created (minted) by depositing crypto assets in a smart contract (called a vault) and redeemed back into crypto assets by sending the token back to the vault.

How does DAI work?

1. Anyone with eligible crypto assets inside Ethereum can send them to a DAI vault smart contract to generate $DAI tokens. Usually, people need to send more value than the $DAI they want.

2. When the DAI vault smart contract receives crypto assets then it creates (mints) $DAI in a proportion according to a set margin. For example, someone may send $300 in $ETH and receive $100 in DAI or 100 $DAI coins.

3. Once the $DAI are issued, they may be used for payments, to trade other tokens, NFTs, or crypto assets, or just hold them as a stablecoin.

4. The way that the value of $DAI is kept 1-to-1 to the US dollar is that if it trades above $1, then people will convert more crypto assets into $DAI and lower its price. The same happens in reverse. If $DAI trades bellow $1, then people will buy $DAI and convert them back into crypto assets.

5. When the DAI vault smart contract receives $DAI from a user, then it destroys (redeems) the tokens and sends them back the corresponding collateral. Users pay a fee when they redeem their $DAI.

Does Emerald support DAI?

Yes, Emerald supports several stablecoins, including DAI.

Thank you for reading this educational post!

Please remember to download Emerald here: