Dai (DAI)
Dai has no company redeeming it for dollars. Smart contracts and token-holder votes do that job instead, with their own kind of risk.
On this page
- Dai is a decentralized stablecoin on Ethereum; the Multi-Collateral version has been live on mainnet since 18 November 2019.[1]
- New Dai is generated when a user locks collateral in a Vault and is burned when the user repays it.[1]
- Dai is backed by a mix of stable collateral and an excess of volatile collateral, protected by liquidations.[4]
- A 2024 governance proposal introduced USDS as upgraded Dai, convertible 1:1 in both directions.[3]
- In March 2023 Dai fell below 90 cents alongside USDC, showing how stablecoin collateral can pass on another issuer's problems.[6]
What is Dai and who created it?
Dai, ticker DAI, is described in its official developer guide as a decentralized stablecoin built on Ethereum.[1] It aims to stay worth one US dollar, like USDT or USDC, but it works differently: there is no company that takes your dollars and promises to give them back.
Dai is produced by the Maker Protocol, a set of smart contracts. Changes to the protocol are voted on by holders of the MKR governance token. The executive vote that switched on Multi-Collateral Dai, the current version, set activation for Monday 18 November 2019.[2] The developer guide confirms it has been live on Ethereum mainnet since that date.[1]
In September 2024 a governance poll proposed new tokens: USDS as upgraded Dai and SKY as upgraded MKR, with DAI and USDS convertible 1:1 in both directions and MKR converting to SKY at 1:24,000.[3] Dai itself continues to exist alongside USDS.
How does Dai work?
The protocol's overview says Dai is backed by a combination of stable collateral and an excess of volatile collateral.[4] Three tools keep it near $1:
- Over-collateralised Vaults. Each Vault must hold more collateral than the Dai drawn from it. A position that falls below its liquidation ratio can be liquidated.[4]
- Stability fees and debt ceilings. Governance raises or lowers the fee on Vault debt to encourage creating or destroying Dai, and caps how much Dai each collateral type can back.[4]
- Peg Stability Module (PSM). Users can swap a collateral type such as USDC directly for Dai at a fixed rate, with two governance-set fees for swapping in and out.[5]
Federal Reserve economists note that Dai's primary market, where tokens are created and destroyed, is open to any Ethereum user, unlike USDT and USDC; in 2022 data they counted 6,780 unique primary-market participants for Dai.[6]
| Question | Dai | USDT / USDC |
|---|---|---|
| Who creates new tokens? | Any user who opens a Vault or uses the PSM | Verified business customers of one company |
| What backs them? | Crypto collateral and other stablecoins held by smart contracts | Reserves of cash and short-term government debt |
| Who sets the rules? | MKR holder votes | The issuing company and its regulators |
How are new Dai created and redeemed?
The developer guide puts it simply: tokens are created when a user adds collateral to a Vault and generates new Dai, and burned when the same user pays back that amount of Dai.[1] Only an adapter contract inside the protocol is authorised to call the mint and burn functions.[1]
Lock collateral. Deposit an accepted crypto-asset into a Vault.[1]
Generate Dai. Draw Dai against it, staying above the liquidation ratio.[4]
Repay and unlock. Return the Dai plus the stability fee; the Dai is burned and the collateral released.[1][4]
For the lending mechanics behind Vaults, see how DeFi lending and borrowing work.
What is Dai used for?
Dai is an ERC-20 token with 18 decimals, so it works with Ethereum wallets and applications that accept standard tokens.[1] Its permit feature lets a holder approve transfers with a signed message under the EIP-712 standard, so they do not have to pay gas for the approval.[1] Holders can also deposit Dai into the protocol's Dai Savings Rate contract.[1]
In practice that makes Dai a dollar unit inside decentralized finance: for trading on decentralized exchanges, as loan collateral or as the asset borrowed. Each of those uses adds the risks of the application on top of the risks of Dai itself.
What are the key dates in Dai's history?
The current Dai dates from 2019. The table uses governance records, developer docs and Federal Reserve research.[2][1][6][3]
| Date | What happened |
|---|---|
| 18 November 2019, 4 pm UTC | Executive vote activates Multi-Collateral Dai on Ethereum mainnet |
| 16 December 2022 | Fed note groups Dai-style designs as on-chain collateralised stablecoins |
| March 2023 | After Circle discloses USDC reserves at Silicon Valley Bank, USDC and Dai fall below 90 cents; both recover over about three days |
| 23 February 2024 | Fed note finds Dai's primary market open to any Ethereum user |
| 9 September 2024 | Governance poll proposes USDS (upgraded Dai) and SKY (upgraded MKR) |
Source for the 2022 row: Federal Reserve.[7]
What are the specific risks of holding Dai?
Collateral swings. The Federal Reserve notes that stablecoins backed by on-chain collateral rely on redemption plus over-collateralisation and are vulnerable to crypto volatility.[7]
Borrowed stability. The Peg Stability Module concentrates exposure to other stablecoins; if that stablecoin loses its peg, the protocol bears the loss.[5] That is what happened in March 2023, when USDC and Dai both fell below 90 cents before recovering over about three days.[6]
Governance concentration. The Financial Stability Board found that voting power across major DeFi protocols is extremely concentrated, so a few holders can in practice decide outcomes.[8]
Smart contract and operational risk. The FSB also warns that DeFi inherits traditional vulnerabilities such as operational fragility and leverage.[8] Read the main risks of DeFi.
What mistakes do beginners make with Dai?
- Confusing DAI and USDS. They are separate tokens that convert 1:1 through the protocol.[3] Check which one an app or exchange actually supports.
- Drawing Dai close to the liquidation line. A modest price fall can liquidate a thin Vault.[4]
- Assuming no company means no counterparty. Dai's backing includes other stablecoins through the PSM, so their issuers matter too.[5]
- Treating the savings rate as fixed. Governance sets it and can change it.
Questions readers ask
Is Dai the same as USDS?
No. A 2024 governance proposal introduced USDS as an upgraded Dai, with conversion in both directions at 1:1.[3] Both tokens can exist at the same time.
Can anyone create Dai?
Anyone who locks accepted collateral in a Vault can generate Dai.[1] The Federal Reserve notes this open primary market is a key difference from USDT and USDC.[6]
Who controls Dai?
No single company. Protocol changes are approved by votes of MKR holders, as in the 2019 vote that launched Multi-Collateral Dai.[2]
Dai swaps a company's promise for collateral, smart contracts and token-holder votes.[4] That removes some risks and adds others: collateral crashes, exposure to the stablecoins in its reserves and concentrated governance. Before holding Dai, understand how Vaults, the PSM and the 1:1 link to USDS work.
Sources
- Sky (formerly MakerDAO) — developer guides, Dai token developer guide (2024)Primary source
- Sky (formerly MakerDAO) — governance records, Executive Vote — Launch Multi-Collateral Dai (2019)Primary source
- Sky (formerly MakerDAO) — governance records, Sky Protocol Launch Season — Token and Product Launch Parameter Proposal (9 September 2024) (2024)Primary source
- Sky (formerly MakerDAO) — official docs, Dai overview (2024)Primary source
- Sky (formerly MakerDAO) — governance manual, Peg Stability Module (governance manual) (2024)Primary source
- Board of Governors of the Federal Reserve System, Primary and Secondary Markets for Stablecoins (FEDS Notes) (2024)Primary source
- Board of Governors of the Federal Reserve System, The stable in stablecoins (FEDS Notes) (2022)Primary source
- Financial Stability Board, The Financial Stability Risks of Decentralised Finance (2023)Primary source
Educational content only — not financial, investment, legal or tax advice. Crypto-assets are high-risk and you could lose all the money you put in. Rules differ by country; check with your national regulator. See our risk disclosure and editorial policy.
Read next
- Stablecoins & Payments · Beginner
Types of stablecoins
Fiat-backed, crypto-backed and algorithmic designs side by side, with the failure mode of each.
- Stablecoins & Payments · Beginner
How do stablecoins keep their peg?
Primary vs secondary markets, arbitrage with real fee schedules, and the three things that break a peg.
- DeFi · Intermediate
How DeFi lending and borrowing work
Pools, collateral, health factor and liquidation — the mechanics behind on-chain loans.
- Glossary · Definition · Beginner
Depeg
When a stablecoin slips from $1: causes, the 2023 USDC case and the UST collapse.
