Crypto Gloss

DAI

DAI is a decentralized stablecoin created and governed by MakerDAO (rebranded to Sky Protocol in 2023-2024) that maintains a $ 1.00 peg through an over-collateralization mechanism — users lock crypto assets as collateral in Collateralized Debt Positions (CDPs), now called Vaults, and receive DAI equivalent to a portion of their collateral’s value (typically 66-75%). If the collateral value falls below the minimum threshold, the position is automatically liquidated by the protocol. Unlike USDT or USDC — which are custodial stablecoins backed by real-world US dollar assets held by a company — DAI is governed by MKR token holders (now rebranding to SKY/USDS) through on-chain governance and theoretically requires no trusted intermediary to maintain its dollar peg. In practice, DAI has evolved from a “pure” decentralized stablecoin: approximately 50-70% of DAI’s backing has at various times been USDC (itself a centralized stablecoin), creating a philosophical tension between DAI’s decentralization ethos and practical stability. MakerDAO’s 2023-2024 “Endgame” restructuring — which renamed DAI to “USDS” and MKR to “SKY” within a new protocol architecture — represents the most ambitious redesign of the protocol to address these tensions while maintaining DAI as the most battle-tested decentralized stablecoin in existence (operative since December 2017 without a single catastrophic depegging).

Key Facts

  • Created by: MakerDAO (now Sky Protocol)
  • Launched: Multi-collateral DAI: November 2019 (single-collateral Sai: December 2017)
  • Peg: 1 DAI = $1.00 USD (soft peg)
  • Mechanism: Over-collateralized crypto assets in on-chain Vaults
  • Governance token: MKR (now rebranding to SKY)
  • Circulating supply: $4-6B (2024)
  • Collateral types: ETH, WBTC, USDC, Real World Assets (RWAs), and others

How DAI Works

The CDP/Vault mechanism:

  1. Deposit collateral: User deposits ETH (or other approved collateral) into a Maker Vault
  2. Generate DAI: Protocol allows generating DAI up to the collateralization ratio (e.g., 150% minimum — $150 ETH collateral for $100 DAI)
  3. Use DAI: DAI behaves like a dollar stablecoin; can be used in DeFi, traded, sent
  4. Return DAI: To recover collateral, user repays exact DAI borrowed + stability fee (interest)
  5. Liquidation: If collateral value falls below minimum collateralization: protocol auctions collateral to repay DAI

DAI’s De-centralization Problem

The USDC backing paradox:

  • MakerDAO accepted USDC as collateral in 2020 for stability
  • During 2021-2022: USDC became 50-70% of DAI’s backing
  • Implication: “Decentralized” DAI was largely backed by Centralized USDC
  • The Tornado Cash precedent: in 2022, Circle froze USDC in Tornado Cash contracts; if MakerDAO had significant Tornado Cash exposure, DAI could have been affected
  • Endgame: MakerDAO redesign aimed to reduce USDC dependency via Real World Assets

Real World Assets (RWAs) in Maker

MakerDAO’s solution to the USDC dependency:

  • US Treasury bills: Maker allocated billions to short-duration US Treasuries via institutional partners (Monetalis Clydesdale, BlockTower Andromeda)
  • Coinbase Prime: Maker deposits USDC directly with Coinbase to earn yield
  • Centrifuge: Tokenized real-world credit assets
  • Benefit: Real yield (5%+ on Treasuries) vs. 0% on idle USDC
  • Revenue impact: RWA yield became Maker’s primary revenue source
  • 2023 profit: MakerDAO reported $200M+ in annual revenue primarily from RWA yield

The Endgame Rebranding

MakerDAO’s 2024 restructuring:

  • DAI → USDS (new stablecoin name)
  • MKR → SKY (new governance token; converting at 1 MKR = 24,000 SKY)
  • Sky Protocol: New umbrella branding
  • SubDAOs: Independent specialized DAOs for different collateral strategies
  • Reasoning: Simplify governance complexity; prepare for regulatory environment; improve capital efficiency

Related Terms

Sources

  1. “DAI’s Seven-Year Journey: From Crypto-Pure to RWA-Backed” — Bankless / DeFi History Research (2024). Historical analysis of DAI’s evolution from the first single-collateral stablecoin (backed only by ETH in 2017) through multi-collateral expansion (2019), the USDC dependency crisis (2020-2022), the RWA pivot (2022-2023), and the Endgame rebranding (2023-2024) — examining whether each evolution strengthened or compromised the original decentralized vision.
  1. “MakerDAO’s Real World Assets Strategy: Treasury Bills and Institutional Credit” — Messari / Protocol Revenue Research (2023). Deep analysis of MakerDAO’s RWA (Real World Assets) strategy — examining the specific structures (Monetalis Clydesdale for UK T-bills, BlockTower Andromeda for US T-bills, Centrifuge for trade finance), the legal frameworks enabling these allocations, the yield generated, the risks (legal, counterparty, regulatory), and whether RWA allocation is compatible with the decentralization ethos of a “decentralized” protocol.
  1. “Maker’s Black Thursday: How DAI Survived a $1B Collateral Crash” — The Block / DeFi Stress Testing Research (2020, retrospective 2023). Retrospective analysis of the March 2020 “Black Thursday” event — when ETH’s 50% single-day crash caused cascading Maker CDP liquidations, $8M in DAI undercollateralization, and near-failure of the protocol — examining the technical failures (ETH gas fees made liquidation bots fail), the governance response (MKR auction to recapitalize), and how the protocol was redesigned to handle future stress events.
  1. “DAI vs. LUSD vs. FRAX: Decentralized Stablecoin Design Approaches” — Delphi Digital / Stablecoin Design Research (2023). Comparative analysis of three major approaches to decentralized stablecoin design — DAI (over-collateralization with mixed real-world assets), LUSD (pure ETH over-collateralization, no algorithmic components, no real-world assets), and FRAX (fractional reserve with AMO mechanisms) — examining the tradeoffs between decentralization purity, capital efficiency, and peg stability.
  1. “MakerDAO’s Endgame: The Most Ambitious DeFi Governance Redesign” — Bankless / Governance Research (2023-2024). Comprehensive analysis of MakerDAO’s “Endgame” — Rune Christensen’s proposal to fundamentally restructure Maker’s governance, token model, and operational structure — examining the SubDAO architecture (independent specialized units), the DAI→USDS and MKR→SKY rebrandings, the new token emission model, and whether Endgame represents a sustainable solution to the governance complexity and community tension that has plagued Maker since 2021.