I just realized an interesting thing about what DAI is and why it differs from other stablecoins on the market. Not all stablecoins are created equal, and DAI is a prime example.

Before DAI was created, the stablecoin market mainly relied on centralized issuers. Tether, USDC, PAX, Gemini Coin — all depend on one thing: you must trust that the company behind them holds enough USD in the bank. But DAI does things differently. It is an ERC20 token on Ethereum with a stable value around 1 USD, but completely decentralized.

What is the mechanism of DAI? When you borrow on MakerDAO, DAI is generated. Its price is automatically controlled through smart contracts. If DAI deviates too far from 1 USD, the MKR token will be burned or minted to balance it. No trusted parties, no banks — everything is handled by algorithms. This approach has proven quite stable over the past three years.

Why is DAI important? Because it opens up many possibilities. Simply put, as a token on Ethereum, anyone can build or use DAI without permission. Developers wrap it into different contracts — for example, xDAI allows fast transfers on sidechains, or rDAI enables earning interest.

Getting DAI is also easy. The most direct way is to borrow on MakerDAO's Oasis, or you can trade it on exchanges. DAI is burned when loans are repaid, creating a natural cycle.

What is the reality of DAI in practice? It works great as a volatility hedge. When you worry the market might decline, DAI is an ideal asset to store value. It is also one of the most popular cryptocurrencies for actual spending.

The interesting part is that the DeFi boom in 2020 pushed DAI into a prominent position. Lending services appeared, allowing earning interest on DAI deposits. Some dApps even automatically use interest to buy other assets. Bitcoin can now also be used to generate DAI. All of this shows that DAI is not just an ordinary stablecoin, but an essential part of the DeFi ecosystem.