Dai is an Ethereum-based stable coin (ERC-20 token) on the MakerDAO protocol that aims to maintain a peg to the U.S. dollar by locking other crypto assets in contracts.
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A brief history
The Maker Protocol was founded in 2014 by Rune Christensen. The Maker Protocol is an open-source project whose goal was to operate a credit system that would allow users to take out loans collateralized by cryptocurrencies. DAI officially launched on the Maker Protocol in 2017 as a means to provide a non-volatile lending asset for businesses and individuals. DAI maintains its value not by being backed by U.S. dollars, but by using collateralized debt denominated in ether (ETH), Ethereum’s cryptocurrency. Through smart contracts running on Ethereum, the Maker Protocols enable borrowers to lock ETH and other crypto assets, thus collateralizing them, in order to generate new DAI tokens in the form of loans.
DAI in practice
Dai (DAI) is a decentralized stablecoin running on Ethereum. The price of DAI is soft-pegged to the US dollar, however, unlike centralized stablecoins, DAI isn't backed by US dollars in a bank account. Instead, it's collateralized by a mix of other cryptocurrencies deposited into smart contract vaults every time DAI is minted using the Maker protocol. If borrowers wish to recover the locked ETH, they will have to return the DAI to the protocol and pay a fee. Additionally, in the event of liquidation, the Maker Protocol will take the collateral and sell it using an internal market-based auction mechanism.