Basics
DAI explained
Almost every stablecoin is an IOU. DAI is the best-known exception: it is created when someone locks crypto as collateral and destroyed when that loan is repaid.
Money you mint yourself
Users lock collateral in the Sky protocol (formerly MakerDAO) and borrow DAI against it. Supply always equals outstanding loans, each backed by more value than was borrowed. The question is not whether an issuer holds the money, but whether collateral suffices and liquidations work.
Overcollateralisation
Ether positions historically require 145 to 170 per cent coverage; prudent users hold far more. Below the minimum the position is auctioned, with a liquidation penalty that keeps borrowers attentive and auctions attractive to bidders.
Steering the peg
Three levers: the stability fee borrowers pay, the savings rate holders earn, and the peg stability module allowing one-for-one swaps with USDC — fast and effective, but centralising.
The cost: USDC in the reserve
In March 2023 USDC fell to about $0.88 after a US bank failure and DAI followed, because much of its backing was USDC. Backing has since broadened into short-dated Treasuries, which funds the savings rate but adds counterparty risk.
Black Thursday
On 12 March 2020 ether nearly halved, the network congested and some auctions cleared at zero, leaving a multi-million shortfall covered by auctioning governance tokens. Auction duration, partial bids, oracle delays and an emergency shutdown were added afterwards.
When DAI makes sense
It suits censorship-resistant use and decentralised applications. As a simple cash position for a European investor it is weaker: it tracks the dollar, carries contract and governance risk, and lacks a MiCA-authorised issuer, so EU trading is restricted.
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Frequently asked questions
Is DAI as safe as USDC?
The risk differs: collateral, code and governance instead of an issuer and its banks — while holding USDC in reserve.
Can I mint DAI myself?
Yes, by locking collateral and paying a stability fee.
What is the savings rate?
A variable rate for holders who lock DAI, funded by protocol revenue.
Why did DAI slip in March 2023?
Its backing was heavily USDC, which itself de-pegged.
Can I hold DAI in the EU?
Self-custody yes; regulated EU trading is limited without a MiCA-authorised issuer.
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