DAI
Web3 / cryptocurrency types
A decentralized, Ethereum-based stablecoin pegged to the US dollar through an overcollateralized lending mechanism, originally created by MakerDAO and governed by MKR token holders. Users generate DAI by depositing approved collateral assets into Maker Vaults and borrowing against them at a collateralization ratio typically exceeding 150%, meaning $150 in collateral must back every $100 of DAI issued. If collateral falls below the minimum ratio, an automated liquidation process sells it to protect the peg. The stability mechanism combines collateral requirements, a variable stability fee (interest charged on DAI loans), and the DAI Savings Rate (yield paid to DAI holders who lock into the DSR contract). DAI launched in 2017 accepting only ETH as collateral, then expanded to a multi-collateral model in 2019, later adding real-world assets including US Treasuries. In 2023, MakerDAO rebranded to Sky Protocol and introduced USDS as a successor stablecoin, though DAI remained in active circulation throughout 2024-2025. Example: On Black Thursday in March 2020, ETH prices dropped 43% in hours, triggering mass liquidations. A gas fee spike during the chaos prevented liquidation bots from bidding in Maker auctions, allowing $8.32 million in vault debt to be liquidated at zero cost, leaving the protocol with $4 million in bad debt that was later covered through a dilutive MKR auction. Why it matters for DeFi: DAI was the first widely adopted decentralized stablecoin and proved that algorithmic, collateral-backed price stability was viable at scale. Its design influenced every subsequent DeFi stablecoin, and the lessons from its stress events (including Black Thursday and DAI's temporary depeg during the March 2023 USDC crisis) shaped risk management thinking across the industry. It remains one of DeFi's foundational instruments even as newer designs compete for market share.
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