Summary: DAI is the world's first major decentralized stablecoin, designed to maintain a stable 1:1 value with the US dollar through an algorithmic, over-collateralized system. This research examines DAI's governance model, collateral mechanisms, stability systems, and the fundamental trade-offs between decentralization, capital efficiency, and peg stability.
DAI is the world's first major decentralized stablecoin, designed to maintain a stable 1:1 value with the US dollar through an algorithmic, over-collateralized system rather than centralized reserves. Created and managed by MakerDAO, a decentralized autonomous organization, DAI represents a fundamentally different approach to stablecoins compared to centralized alternatives like USDC or USDT.
Unlike traditional fiat-backed stablecoins that rely on bank accounts holding equivalent dollar reserves, DAI is generated through collateralized debt positions (CDPs, now called Vaults) where users lock up cryptocurrency or other approved assets worth more than the DAI they mint. This over-collateralization model ensures that DAI remains backed by tangible value while maintaining decentralization.
Decentralized Governance: DAI is governed by MKR token holders who vote on critical parameters including collateral types, stability fees, debt ceilings, and system upgrades. No single entity controls the protocol.
Over-Collateralized Backing: Every DAI in circulation is backed by excess collateral locked in Maker Vaults. Users must deposit assets worth significantly more than the DAI they generate (e.g., 150% collateralization ratio for ETH).
Multi-Collateral System: Initially launched in 2017 as Single-Collateral DAI (accepting only ETH), the system upgraded to Multi-Collateral DAI (MCD) in November 2019, now accepting various assets including ETH, WBTC, stablecoins, and tokenized real-world assets.
Algorithmic Stability: DAI maintains its peg through automatic mechanisms including liquidations, the DAI Savings Rate (DSR), and the Peg Stability Module (PSM), adjusted by governance rather than human intervention.
Ethereum-Native: Built entirely on Ethereum smart contracts with complete transparency—all transactions, collateral positions, and system parameters are publicly auditable on the blockchain.
Users generate DAI by opening a Maker Vault and depositing approved collateral (such as ETH or WBTC). The system allows them to generate DAI up to a certain percentage of their collateral value, determined by the collateralization ratio for that asset type. For example, with a 150% collateralization ratio, depositing $1,500 worth of ETH allows generating up to $1,000 DAI.
The generated DAI is essentially a loan against the collateral, with users paying a Stability Fee (interest rate) determined by MKR governance. To reclaim their collateral, users must repay the DAI they generated plus accumulated stability fees. If collateral value falls below the required ratio, the position gets liquidated automatically, with the collateral sold to cover the debt plus a liquidation penalty.
DAI serves multiple critical functions in the decentralized finance ecosystem:
2014: MakerDAO's origins trace to when Rune Christensen, a Danish entrepreneur, began developing the concept of a decentralized stablecoin backed by cryptocurrency collateral.
2015: Following Ethereum's launch, the team began building the first iteration of the protocol on Ethereum's smart contract platform. The first whitepaper drafts circulated.
2018: The Maker Foundation was formally established to steward the protocol's development, with Rune Christensen serving as CEO.
December 18, 2017: MakerDAO launched Single-Collateral DAI (SCD), originally called "Sai," accepting only ETH as collateral. Users could lock ETH into CDPs and generate DAI against it.
The launch whitepaper introduced core mechanisms: CDPs as the primary method for generating DAI, Target Price as the peg reference point, the liquidation system for maintaining over-collateralization, and Global Settlement (later Emergency Shutdown) as the ultimate safety mechanism.
November 2018: The protocol had locked over 1,000,000 ETH in CDPs, demonstrating strong product-market fit.
November 18, 2019: MakerDAO executed its most significant upgrade: the transition from Single-Collateral DAI to Multi-Collateral DAI (MCD).
MCD launched with ETH and Basic Attention Token (BAT) as initial collateral options. The upgrade introduced several critical innovations:
March 12, 2020 — "Black Thursday": The global COVID-19 pandemic declaration triggered massive market panic, causing ETH to plummet approximately 43% in a single day, from around $200 to $110.
The Perfect Storm:
The community response was swift: emergency meetings, debt auctions minting new MKR tokens to recapitalize the system, and critical protocol improvements including extended auction durations, improved oracle robustness, and the Peg Stability Module.
2020: MakerDAO introduced the Peg Stability Module (PSM) in response to Black Thursday and persistent DAI trading above $1.
The PSM allows users to swap stablecoins (primarily USDC, but also USDP and GUSD) for DAI at a fixed 1:1 rate with minimal fees. While highly effective at maintaining the peg, the PSM created philosophical tension within the community.
Critical Dependency: At its peak, USDC backing through the PSM represented over 60% of DAI's collateral, effectively making DAI partially backed by Circle's centralized stablecoin.
Existential Questions: If most DAI is backed by USDC, is DAI truly decentralized? What happens if Circle blacklists Maker's addresses?
April 2021: MakerDAO pioneered integrating tokenized real-world assets (RWAs) as collateral, with New Silver's tokenized real estate loans becoming the first milestone.
Through partnerships with Centrifuge and direct arrangements, Maker began accepting:
2023-2024: RWAs grew to represent 40-50% of DAI's backing, with billions in U.S. Treasuries providing stable, low-risk yield to the protocol.
August 2022: Following Tornado Cash sanctions and intensifying regulatory pressures, Rune Christensen published his ambitious "Endgame Plan"—a comprehensive roadmap to restructure MakerDAO entirely.
The Endgame Plan's core elements included:
August 2024: MakerDAO executed a fundamental transition, rebranding to "Sky" and introducing new tokens USDS (an upgraded DAI) and SKY (replacing MKR at a 1:24,000 ratio).
Key developments:
October 2025: The ecosystem operates with dual branding—legacy DAI/MKR continue functioning while USDS/SKY attract new users. DAI supply stands at approximately $5 billion, making it the largest decentralized stablecoin.
Cryptocurrency Collateral:
Stablecoin Collateral (PSM):
Real-World Assets (RWAs):
DAI's ~$5 billion supply is backed roughly by:
Critical Shift: This represents a dramatic change from early years when 100% of backing was cryptocurrency.
The DAI Savings Rate is a variable interest rate that DAI holders can earn by locking their DAI into a DSR smart contract. It serves as a critical monetary policy tool for maintaining DAI's peg through demand-side management.
Core Mechanics:
DSR as Monetary Policy:
Historical DSR Rates:
The PSM allows instant 1:1 swaps between DAI and approved stablecoins (primarily USDC) with minimal or zero fees. It serves as a hard ceiling for DAI's price—if DAI trades above $1, arbitrageurs can mint DAI for exactly $1 worth of USDC.
PSM Benefits:
PSM Criticisms:
Stability Fees are the interest rates charged to Vault owners for generating DAI against their collateral. These fees serve multiple purposes and represent a primary revenue source for the protocol.
How Stability Fees Work:
Adjustment Logic:
MKR governance has authority over virtually all protocol parameters:
Governance Polls:
Executive Votes:
MakerDAO faces impossible trade-offs:
Critical Insight: Cannot optimize all three simultaneously. Every project picks two and compromises on the third.
Critical Question: When 40%+ of DAI is backed by USDC through PSM, is DAI effectively "wrapped USDC" rather than a truly independent stablecoin?
Defenders argue: PSM provides necessary stability during crises, other collateral types maintain meaningful decentralization, PSM can be wound down if needed
Critics argue: Current composition betrays decentralization ethos, should reduce USDC exposure significantly
Cryptocurrency Collateral:
Stablecoin Collateral (PSM):
Real-World Assets:
DAI represents one of the most ambitious and complex experiments in decentralized finance. As the largest decentralized stablecoin, it has successfully navigated multiple existential crises, evolved through revolutionary governance changes, and pioneered the integration of real-world assets into DeFi.
However, DAI's journey illustrates the fundamental tensions between decentralization ideals and practical requirements. The protocol's reliance on USDC through the PSM and growing RWA exposure have sparked intense debates about whether DAI remains truly decentralized or has become a hybrid bridging traditional and decentralized finance.
The Endgame Plan represents MakerDAO's attempt to address these tensions systematically, potentially culminating in a free-floating DAI if regulatory pressures intensify. Whether this ambitious restructuring succeeds in preserving DAI's core principles while ensuring long-term sustainability remains one of the most important questions in DeFi.
For researchers, builders, and users, DAI offers critical lessons about the challenges of creating stable, decentralized money at scale—lessons that will inform the next generation of stablecoin designs and decentralized financial systems.