Dai

What Is DAI?

DAI is a decentralized, US dollar-pegged stablecoin designed to maintain a value close to $1 through collateral backing and blockchain-based financial mechanisms. Unlike cryptocurrencies such as Bitcoin and Ethereum, DAI is intended to provide price stability rather than appreciation, making it useful for payments, trading, lending and decentralized finance (DeFi).

Launched in December 2017, DAI was developed through MakerDAO, one of the earliest major DeFi protocols. The project has since evolved into Sky Protocol, which introduced USDS as an upgraded stablecoin in 2024 while continuing to support DAI.

What distinguishes DAI from conventional stablecoins is its underlying structure. Rather than depending exclusively on dollars held by a centralized issuer, it is supported by a diversified portfolio of cryptocurrency collateral, stablecoins and real-world financial assets managed through smart contracts and governance.

How Does DAI Work?

DAI operates primarily as an ERC-20 token on Ethereum, where smart contracts manage issuance, collateral accounting and the repayment of outstanding debt.

Its original mechanism revolves around overcollateralized borrowing. Users deposit approved assets into smart contracts called Vaults, allowing them to generate stablecoin debt against the value of their collateral.

For example, a user depositing $2,000 worth of ETH might borrow $1,000 in DAI, creating a collateralization ratio of 200%. The extra collateral protects the protocol against price fluctuations.

If the value of the underlying ETH falls below the required collateral threshold, the position can be liquidated to repay outstanding debt.

This model, built around collateralized debt positions, helped establish decentralized borrowing as a major component of DeFi.

Today, DAI also shares its underlying accounting and collateral infrastructure with USDS. The broader Sky system includes stablecoin conversion facilities and specialized capital allocators that deploy funds into approved financial strategies.

How Does DAI Maintain Its $1 Peg?

DAI maintains its dollar target through collateral requirements, market incentives and mechanisms that connect its value to other dollar-denominated assets.

A central component is the Peg Stability Module (PSM), which allows supported stablecoins, particularly USDC, to be exchanged against DAI at defined rates.

When DAI trades above $1, eligible participants can potentially obtain additional DAI through protocol conversion mechanisms and sell it at a premium, increasing supply and helping reduce its price.

When DAI trades below $1, traders may purchase discounted tokens and use supported conversion or debt-repayment mechanisms to capture the difference, encouraging demand.

Sky governance can also adjust borrowing costs and other protocol parameters to influence stablecoin demand and issuance.

These mechanisms have historically helped DAI maintain a relatively stable market value, but the peg is not guaranteed. Liquidity disruptions, collateral losses or problems affecting its backing can cause temporary or prolonged price deviations.

What Backs the DAI Stablecoin?

DAI is supported by the same collateral system underlying Sky Protocol’s USDS stablecoin.

Its backing includes cryptocurrency assets such as ETH and supported staking derivatives, other stablecoins, and exposure to real-world financial instruments.

A significant portion of the ecosystem’s collateral is connected to USDC, government securities, institutional lending and other approved financial arrangements.

This structure differs from DAI’s original model, which relied exclusively on ETH collateral. Over time, diversification has reduced dependence on cryptocurrency price movements while introducing additional financial counterparties.

For example, exposure to USDC introduces reliance on Circle and its reserves, while real-world assets can involve custodians, trustees and legal structures outside the blockchain.

Consequently, DAI is decentralized in its protocol governance and token architecture, but its financial backing is not entirely independent of centralized institutions.

DAI Tokenomics and Supply

DAI has no fixed maximum supply because tokens can be created or removed according to the protocol’s lending, conversion and repayment mechanisms.

DAI can enter circulation through supported borrowing and conversion operations. When associated debt is repaid or tokens are converted through mechanisms that remove DAI from circulation, its supply can contract.

Unlike cryptocurrencies with scheduled mining rewards, DAI issuance responds primarily to demand for dollar-denominated liquidity and the protocol’s collateral requirements.

Its monetary policy therefore focuses on maintaining the peg rather than imposing a predetermined supply ceiling.

DAI vs. USDS: What’s the Difference?

In August 2024, MakerDAO rebranded to Sky and introduced USDS as the successor to DAI.

Both stablecoins target $1 and share the same underlying collateral infrastructure, but they remain separate tokens with different contract designs and ecosystem integrations.

Holders can convert DAI into USDS and reverse the process through Sky’s official converter at a fixed 1:1 ratio without protocol conversion fees.

The migration is optional. DAI remains operational and integrated into existing wallets, exchanges and decentralized applications.

USDS, however, is the focus of Sky Protocol’s newer savings and financial products.

Another important distinction is contract design. DAI’s original token contract does not include a built-in address-freezing function, while USDS was developed with upgradeability that allows governance-approved changes.

Neither distinction eliminates the financial risks associated with the shared collateral system.

Does DAI Generate Interest?

Holding DAI in a cryptocurrency wallet does not automatically generate interest. Users seeking returns must deposit their tokens into a supported savings or lending arrangement.

MakerDAO introduced the DAI Savings Rate (DSR), which allows users to deposit DAI into a protocol-controlled smart contract and receive a variable return determined by governance.

The corresponding tokenized savings position is known as sDAI. Rather than increasing the number of tokens held, sDAI generally accrues value through an increasing redemption rate against the underlying DAI.

The DSR remains available as a legacy savings mechanism, although Sky’s newer savings infrastructure prioritizes USDS and sUSDS.

Users can also supply DAI to external lending platforms such as Aave and Spark, where yields depend on borrowing demand, protocol rules and market conditions.

These stablecoin yield strategies involve additional risks and should not be confused with insured savings accounts.

What Is DAI Used For?

DAI is widely used as a dollar-denominated asset within decentralized finance.

Its primary applications include cryptocurrency trading, international transfers, collateralized lending, liquidity provision and payments between blockchain wallets.

On decentralized exchanges, DAI can serve as a trading pair or liquidity asset, allowing users to exchange cryptocurrencies without converting funds into traditional bank deposits.

Lending protocols also support DAI deposits and borrowing, while certain applications accept it as collateral for other financial positions.

Because DAI operates on Ethereum and through supported cross-chain deployments, it can move between applications with different functionality and fee structures.

However, the availability of DAI does not guarantee sufficient liquidity or identical redemption conditions across every blockchain.

DAI vs. USDT and USDC

DAI, USDT and USDC all aim to track the US dollar, but their structures differ.

USDT and USDC are issued by centralized organizations that manage reserves and provide redemption services to eligible counterparties.

DAI instead operates through Sky’s collateralized financial system, where smart contracts and decentralized governance control key protocol functions.

However, DAI’s exposure to USDC and real-world financial assets means it still depends partly on centralized institutions.

The practical distinction is therefore not that DAI has no centralized risk, but that its issuance, governance and collateral management operate through a different framework.

How to Buy and Store DAI

DAI is available through supported cryptocurrency exchanges, decentralized trading platforms and stablecoin conversion services.

Users can purchase DAI using fiat currencies or exchange other digital assets, depending on their location and platform availability.

As an ERC-20 token, DAI can be stored in Ethereum-compatible wallets such as MetaMask and supported hardware wallets.

The official Ethereum DAI contract address is:0x6B175474E89094C44Da98b954EedeAC495271d0F

Before transferring DAI, users should verify the network and token contract. Bridged versions can have different contract addresses and depend on additional infrastructure.

Users considering conversion to USDS should use verified interfaces and check the destination token before approving transactions.

DAI Risks and Limitations

DAI’s dollar peg does not make it equivalent to cash held in an insured bank account.

Collateral values can decline, liquidation mechanisms can become stressed and smart contract vulnerabilities can expose funds to losses.

Its exposure to USDC creates potential counterparty and asset-freezing risks, while real-world financial investments depend on off-chain custodians and legal arrangements.

Governance is another consideration. SKY tokenholders can influence collateral requirements, borrowing fees and other protocol parameters, potentially changing the system’s risk profile.

Liquidity also matters, particularly when using DAI through smaller exchanges, lending applications or bridged blockchain networks.

Finally, DAI’s continued operation alongside USDS introduces ecosystem fragmentation, as platforms increasingly prioritize different stablecoin integrations.

Is DAI Still Relevant After the Sky Upgrade?

DAI remains an established decentralized stablecoin with extensive integration across cryptocurrency wallets, exchanges and DeFi applications.

Its role has changed since MakerDAO introduced USDS, but the newer token has not replaced DAI’s existing contract or removed its underlying functionality.

DAI continues to provide dollar-denominated liquidity through a collateral-backed system, while USDS represents Sky’s newer approach to stablecoin services and savings products.

Its long-term relevance will depend on sustained liquidity, effective collateral management, reliable redemption mechanisms and continued support from decentralized applications.