DAI is an algorithmic stablecoin based on an ERC-20 token that runs on the Ethereum blockchain, which is created and managed by the Maker platform.
Its peculiarity lies in having a value that always fluctuates around the value of the US dollar (USD), but without there being any single entity managing it. It is based exclusively on Ethereum smart contracts, making it a unique case of a decentralized stablecoin. This makes it one of the most popular stablecoins in the DeFi sector, such that many decentralized finance platforms use it.
This allows them to take advantage of its very low volatility, but without having to trust a manager who is responsible for keeping its value stable. As such, nowadays DAI is referred to as a decentralized algorithmic stablecoin that is collateralized not only with ETH but also with other ERC20 tokens such as BAT. The original version that had ETH as its only collateral is still in circulation, although now it represents only a minority part of the supply.
Decentralized finance allows creating new assets by assembling already existing ones: just as it is possible to use different Lego bricks to combine them together and build stuff, it is also possible to combine ERC-20 tokens using smart contracts to create new tokens. Over time, however, other tokens representing DAI have also been created, for example within individual DeFi platforms.
Compound, for example, is used to lend or borrow via its own cTokens, which are nothing more than derivatives replicating an underlying asset within its own smart contracts. cDAI is the token used by Compound’s smart contracts to allow platform users to lend or borrow using DAI. So, thanks to cDAI, it is possible to lock DAI tokens to lend money in exchange for interest, as well as borrow DAI tokens in exchange for interest.
Chai Dai Savings Rate
Another of these cases tied to DAI is Chai, a token similar to cDAI that allows earning interest through Maker’s Dai Savings Rate (DSR). Chai’s smart contract deposits the DAI in the DSR and issues CHAI tokens that can be freely spent, stored, transferred and exchanged, but also subsequently redeemed in exchange for the underlying DAI plus any interest earned.
Another very similar example is rDAI (redeemable DAI), which allows investing DAI tokens in a liquidity pool that allows for guaranteed loans by generating interest to lenders. As in the previous cases, rDAI allows users to retain ownership of DAI tokens because once they have been locked in to obtain rDAI, it is possible to return the rDAI tokens at any time and recover the full availability of the previously locked DAI tokens.
There are several similar tokens, just like Fulcrum’s iDAI, another DeFi platform that allows decentralized token lending through smart contracts. Fulcrum actually runs on bZx, one of the top ten DeFi platforms currently in existence, which allows both lending and margin trading with leverage. The bZx smart contracts issue iDAI tokens, which basically work roughly the same as previous derivative tokens. However, this has one special feature, namely that its exchange rate is able to decrease if the underlying pool suffers losses, which makes it suitable for building risk management derivatives, for example.
- IdleDAI is a DAI that acts as a tokenized DeFi rebalancer. By depositing DAI on Idle users receive IdleDAI in exchange, while the DAI are automatically lent either on Compound or Fulcrum depending on which platform maximizes the interest rate.
- aDAI is still under development, although it is already active on the testnet, and works like iDAI. It is developed by AAVE as part of Decentralized Lending Pools (DLPs).
- yDAI, on the other hand, while it can be used to lend or borrow, has the peculiar characteristic of not being perpetual, and therefore needs to be periodically renewed. This makes it much more similar to traditional loans, which almost always have a maturity date by which the loan must be repaid. Whereas in the previous cases there was no maturity date because the DAI lent could be left on loan for as long as desired while continuing to earn interest. In the case of yDAI, however, the loans have a maturity date, which can be renewed. The difference between the current price of the yDAI token and its price at maturity reflects the interest rate offered to the lender, allowing the development of a DeFi yield curve.
- gDAIalso uses Fulcrum for lending but uses GasStationNetwork, Kyber and Uniswap to allow users to pay DAI gas fees.
- dDAI is a derivative of rDAI and gDAI. It uses Fulcrum’s iDAI for loans but uses rDAI to create “recipes” that allow callbacks to receive contracts and add data to callbacks. It also integrates with GSN to allow payment of transaction fees with DAI.
- DAI-HRD wraps the DSI DSR deposit in an ERC-20/ERC-777 token that deposits its DAI in the DSR. This contract, called dai-hrd.eth, is trustless and not custodial, because all deposits, withdrawals and transfers take place on the smart contracts, without going through intermediaries or centralized services. The goal of the developers would be to create an ecosystem where smart contracts operate on DAI-HRD, rather than on DAI itself. The fact is that many DAI holders keep their tokens without perceiving any interest because they are not staked in the DSR. Instead, by wrapping DAI tokens in DAI-HRD, not only is it possible to earn interest through DSR, but also to continue to use DAI in a completely free way because the DAI-HRD contract calculates how much DSR is appropriate to withdraw to support the exact transfer of DAI value.
- LSDai is an interest rate swap based on derivatives such as Compound’s cDAI, and creates a Euro-Dollar-like construct that represents a futures contract on Compound’s loan rate on Dai for the duration of the contract. This is achieved using the Market Protocol, which uses the index-based futures model called “iron-cross options”. In this way, LSDai decouples the risk of the two parties through a long and a short position token.
- SwanDAI is a synthetic asset that tracks the deviation of DAI’s price from the US dollar in an exponentially increasing manner using the DAI/USDC API. At expiration, the contract is traded exactly at the index price, and sellers receive a time-based reward to compensate for the estimated risk of DAI’s depegging.
- There is also iSwanDAI, which is also a synthetic asset under development, and which tracks the deviation of the price of iDAI from its highest recorded price. On expiry, the contract is always negotiated at the index price, and sellers collect a time-based reward to compensate them for the risk. Unlike SwanDAI, which only covers the risk of DAI depegging, iSwanDAI also covers the risk associated with the violation of the iDAI contract, i.e. the risk that Fulcrum may fail to properly liquidate the lenders.
- pDAI is based on the PoolDAI protocol for donations without commission and allows users to lend DAI by donating interest to charity. It uses Compound, KyberNetwork, TheGraph and Blocknative.
- Aztec Notes is a form of anonymous DAI that masks senders, recipients and amounts using Zero-Knowledge proofs. It does not use ZK-SNARKs, but algebraic Zero-Knowledge proofs that use Boneh-Boyen signatures. Aztec Notes is therefore used to execute DAI transactions with a high level of privacy.
Meanwhile, zkDAI uses ZK-SNARKs to mask senders, recipients and amounts of DAI transactions, drawing inspiration from Zcash. However, ZK-SNARKs require a large amount of gas, so using zkDAI can be expensive.
However, the first-ever derivative on DAI was xDAI, originally run on a sidechain with Proof of Authority (PoA). Now it runs on a DPoS blockchain with the PoSDAO consensus algorithm.
In addition to these DAI-derived tokens, there are also others, which are still being studied or tested, examples include wxDai (based on xDAI), nmDAI, MetaDAI, MaxDAI and rfDAI,
The process of creating these derivative tokens can be repeated to create new tokens by assembling existing derivative tokens.
For example, a sort of meta-stablecoin could be created by combining DAI, cDAI, Chai and other DAI or other derivative tokens, such as USDT, whose only real limit is the imagination of DeFi developers.
In short, just as it is possible to combine different Lego bricks to create new stuff, it is possible to combine different ERC-20 tokens to create new assets with different characteristics compared to those of the single underlying ones from which they are composed.