DAI: The Decentralized Stablecoin That Runs on Smart Contracts
DAI isn’t like the others. While USDT and USDC rely on centralized companies to hold dollars in a bank, DAI stays pegged through smart contracts and crypto collateral. No banks. No middlemen and not a single point of control.
That difference makes DAI the most decentralized major stablecoin in the market — and a foundational pillar of DeFi.
What Is DAI?
DAI is a crypto-collateralized stablecoin issued by the Maker Protocol. Unlike other stablecoins, it doesn’t get minted by sending fiat to a company. Instead, users deposit crypto into smart contracts to generate DAI.
The protocol aims to keep the value of each DAI token as close to $1 as possible. And it does that through overcollateralization, real-time monitoring, and incentives built into code.
How DAI Maintains Its Peg
Users generate DAI by locking up crypto assets — like ETH, wstETH, wBTC, or USDC — into vaults. These vaults overcollateralize the loan, meaning you must deposit more value than the DAI you mint.
If the collateral value drops too far, the protocol triggers a liquidation, selling the crypto to cover the DAI. This mechanism keeps the peg intact, even during high volatility.
Meanwhile, the protocol uses interest rates (called stability fees) and incentives to balance supply and demand. If DAI trades above $1, users are encouraged to mint and sell. If it dips below $1, they’re incentivized to repay and burn.
How DAI Stays Decentralized
The MakerDAO community governs the entire system. MKR token holders vote on:
Collateral types and parameters
Stability fees and interest rates
Oracles that feed price data
Risk frameworks and emergency mechanisms
Since no central authority holds the reserves, no one can freeze your DAI or block a transfer. That makes it a powerful option for users who care about censorship resistance and self-sovereignty.
What Backed DAI in the Past vs. Today
Originally, DAI was backed only by ETH. Over time, Maker added more collateral types to stabilize supply. Today, DAI’s collateral includes:
Ethereum and Lido staked ETH
Wrapped Bitcoin (wBTC)
Stablecoins like USDC and GUSD
Tokenized real-world assets (RWAs) such as bonds or loans
Although this diversification helps with peg stability, it also introduces some centralization risk, especially when DAI relies on centralized stablecoins like USDC for collateral.
How DAI Is Used Across DeFi
DAI plays a central role in decentralized finance. Protocols and users rely on it because it blends stable value with decentralization.
You’ll commonly see DAI in:
Lending platforms like Aave, Compound, and Spark
DEX liquidity pools across Curve, Balancer, and Uniswap
Savings modules like DSR (DAI Savings Rate), where users earn interest
Payments and remittances through DeFi wallets and global platforms
Treasuries for DAOs and decentralized projects
DAI stands out as the stablecoin for builders, not just traders, because its community governs it and crypto assets back it.
Trade-Offs and Limitations
DAI isn’t risk-free. When markets crash, DAI’s collateral can lose value quickly. If liquidations don’t process in time, undercollateralization becomes a threat.
Also, MakerDAO’s increased exposure to centralized assets has sparked debate. If too much of DAI gets backed by USDC or RWAs, its decentralization weakens, despite the code-based governance.
However, the community continues adapting — updating vault rules, adjusting exposure, and experimenting with new forms of collateral.
Summary Checklist
DAI is a crypto-collateralized stablecoin pegged to the US dollar
Users mint DAI by locking assets into Maker vaults
The protocol overcollateralizes loans and triggers liquidations to hold the peg
MKR token holders govern risk, parameters, and assets
DAI is censorship-resistant and non-custodial
Used widely in DeFi, savings, lending, and payments