Crypto backed stablecoins uses a cryptocurrency token as collateral to compensate for market volatility. Crypto-backed Stablecoins function in the same manner that fiat-backed Stablecoins do; they retain their value to a pegged asset. Instead of utilizing money as collateral, the crypto-backed Stablecoin uses cryptocurrency as collateral – often, Ethereum is used as collateral.
MakerDAO’s DAI Stablecoin
DAI is a crypto-asset that uses an automated system of smart contracts on the Ethereum (ETH) blockchain to maintain a 1:1 value with the US dollar. DAI is the world’s first Ethereum-based stablecoin. MakerDAO, a non-profit organization dedicated to restoring stability to the bitcoin economy, is in charge of maintaining and regulating it. DAI coin was first released in 2017 as a MakerDAO product, with smart contracts running on the Ethereum network. Unlike other asset-backed cryptocurrency, DAI is not controlled by a single entity.
In a peer-to-peer (P2P) system, anyone can transmit and receive DAI without the need for third parties. Many traders use it to back their profits after they depart the market, same to how you would convert Ethereum (ETH), Binance Coin (BNB), or Bitcoin (BTC) for Tether (USDT) or USD Coin (USDC). To get DAI, you can either use ETH to buy the equivalent dollar amount of DAI on a crypto market or use the Maker protocol to collateralize ETH and other tokens. Maker offers Collateralized Debt Positions (CDPs), which are smart contracts that you can use to secure your collateral while also generating DAI.