For this Medium post, we will delve into what the Dai Stablecoin is, what “stablecoin” means in general, and how they are becoming an important part of the cryptocurrency ecosystem, from the standard user all the way up to how the largest crypto exchanges utilize stablecoins.
Stablecoin General Summary
Simply put, a stablecoin is a crypto asset that is value-backed by another asset (that is typically more ubiquitous) like Fiat or a commodity. Things like USD or gold are traded every day at a massive scale, which in turn lends price stability and low trading volatility traits to these assets. Many stablecoin assets have a 1:1 backing (some transparent, some not) to these low volatility assets, allowing users to rest assured that the “worthiness” of a stablecoin is true and reliable. Some utilized assets/commodities to back stablecoins include the U.S. Dollar, ETH, gold and diamonds, among many others.
Larger exchanges such as Gemini and Poloniex have created their own stablecoins, backed by USD, to provide a low volatility vehicle for investors to store crypto value during tumultuous times in the market. As these stablecoins develop and mature, more use cases continue to pop up, and the list of assets available to collateralize against grows everyday. The main takeaway is that stable assets are a very promising technology to finally bring crypto usage into the fold of everyday exchange-for-goods. Maker’s Dai product is leading the way for the collaterization model of stable crypto assets.
Maker & Dai
Maker’s Dai stablecoin is a low/no volatility asset running on the Ethereum network that matches 1:1 with the price of the U.S. Dollar. The collateral backing Dai is carefully managed by Maker token holders, with multiple layers of possible reactions to price volatility in order to maintain the 1 Dai-to-$1 relationship. A thorough Maker For Dummies explanation by Gregory DiPrisco can be found here.
Since Dai is stored 100% on-chain, it provides advantages over other stablecoin offerings:
- Completely decentralized — Many Fiat-linked stablecoins, for example Tether, are backed by USD held by a single banking entity, a completely centralized approach to backing stablecoin assets (I.O.U. model). With Dai, the user can collateralize their own assets with Dai utilizing Maker’s CDP dapp, a powerful tool for creating decentralized smart contracts. No single point-of-failure required.
- Multiple backing assets — Since users can tokenize their own assets via smart contracts, the asset backing Dai is diversified, protecting the Dai value against any single asset class quickly losing substantial value.
- Transparent & Audit-able Records — All locked-up collateral can easily be viewed on the blockchain.
- Fully Collateralized — Dai is backed by real, liquid assets locked up via smart contract. It is not an I.O.U. issuance nor does it require trust of a single controlling entity.
The collateral model used by Dai for providing a low volatility asset to crypto users is arguably the best approach for the everyday user seeking low-risk value storage. Complete visibility of backing assets is paramount to establishing trust in a stablecoin, and with thorough and actionable price stability mechanisms in place, Maker has developed the novel groundwork necessary to bring crypto mainstream.
A Stablecoin Future
Cryptocurrency has been struggling to find a use case strong enough to introduce itself to the everyday person. Support of merchants and vendors to transact in Bitcoin has dwindled this year and, with high price volatility, the average person will likely not be buying their next cup of coffee with crypto currently. As with Satoshi introducing blockchain technology to the world, the next leaders in crypto will be showing the world how to put this disruptive tech to good, purposeful use in their lives.
Stablecoins open the door to mass adoption by providing low/no volatility options to purchase everyday goods and services, be it buying a meal, setting up monthly subscriptions to services, or taking out a collateral-backed crypto loan. The use cases are endless, and as stablecoins continue to develop, everyday spenders will need an easy-to-use platform to transact.
Currently, large centralized exchanges are creating their own stablecoins to provide value storage for customers. While providing convenience, some of these assets lack both accountability via opaque asset backing mechanisms, and easy-to-use storage options for the everyday user (Remember that storing crypto on exchanges means you don’t actually own the asset). Maker is developing Dai, the transparent, fully collateralized stablecoin with real-world use cases, and ZelCore has built the convenient, secure, 100% trustless wallet everyone can use to store their crypto.
“Decentralization is a core element of MakerDAO’s philosophy and the Dai Credit System,” said Rune Christensen, CEO and Co Founder of MakerDAO. “ZelCore’s commitment to building and supporting decentralized solutions for the blockchain makes them a fantastic integration partner for Maker.”
ZelCore offers a great UI/UX platform to store and exchange today’s cryptocurrency for Desktop and Mobile (iOS+Android). In Q1 2019, ZelCore will have its purpose-built, native decentralized exchange, ZelEx, built right into the wallet to trade all assets, with no loss of asset custody and no need to send and receive assets with a bunch of different wallet applications.
To read more about the ZelCore multi-asset wallet, please see here.
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Written by Zel Technologies, GmbH — 04 December 2018 — Rev. 1