What is DAI?
DAI is an ERC-20 stablecoin that is meant to have a soft peg at $1.00.
What problem does it solve?
Cryptocurrencies tend to have a lot of volatility. Sometimes their excessive volatility outweighs their positive benefits and makes them unpractical to use. Cryptocurrencies offer censorship resistant, no borders, low fees, programmability, but sometimes their rapid price movements make them undesirable to use instead of something more stable like the US Dollar. To solve this problem, stable coins were created, but all stable coins are not created equally.
The most popular stablecoins are backed by dollars that are in a reserve, so that each coin is backed by 1 dollar. The problem with those types of stablecoins, sometimes referred to as IOU (I owe you) stablecoins is that their reserves may not actually be as stocked as they are supposed to be, and they are at risk of being compromised by a third party.
DAI presents a different type of stablecoin that does not need a centralized reserve nor a centralized governing force. It is more transparent than other stablecoins such as Tether because all of their coins are publicly auditable on the DAI Dashboard. Decentralized applications may feel more comfortable using DAI as their native currency instead of something like Tether because they do not have to worry about the success of a third party company controlling their stablecoin. DAI is autonomous Why rely on something like Tether when there is a chance that Tether Limited may fold however small or large that chance may be?
How does it work?
Instead of being backed by dollars, DAI is backed by Ether and in emergencies, Maker tokens. DAI plans on incorporating other cryptocurrencies to use as collateral in the future like OmiseGO, but those have not been implemented yet.
To create DAI, one needs to send 150% worth of the DAI they want to create in the form Ether to a smart contract. The smart contract trades the collateralized Ether for DAI. The DAI can be redeemed for the collateral at any time, but in order to redeem the collateral, one needs to burn a small amount of Maker tokens called a governance fee.
DAI remains stable at $1.00 because the price is psychologically baked into its price expectations and because Ether can be used to redeem DAI. If the price fluctuated below $1.00, more users would buy DAI and return their DAI to their smart contract and effectively get a discount for their collateral until the supply of DAI was reduced enough for its price to return back to $1.00.
If the price fluctuated above $1.00, users would have an incentive to create more DAI until the supply was high enough to the point to where it would not be trading at a premium anymore.
What is it used for?
DAI is a versatile ERC-20 token that can be used to represent roughly $1.00 worth of value. Unlike traditional dollars, DAI tokens are borderless, can be sent quickly anywhere, have low fees, and cannot easily be censored. They will likely be used in decentralized applications that require stable currencies, like Augur.
Why does it need a token?
DAI’s tokenization makes it easy to send anywhere and incorporate it into any application. DAI needs a token because a token/coin is necessary for the creation of a stable cryptocurrency.
BlockWolf feels most comfortable holding DAI compared to other stablecoins but would still not recommend holding DAI for an extended period of time just because its system could still be vulnerable to instability or attacks. We like how it does not rely on a central party and think it is a more apt currency to use for applications that intend on remaining entirely decentralized and require a stablecoin.
We do not like that so much Ether/collateral needs to be locked up in order to create DAI but the market will decide how much of an issue that is. It probably is not that big of a deal right now considering that many cryptocurrency owners hold their cryptocurrencies passively without needing liquidity anyway.