DAI is one of the most established decentralised stablecoins in the digital finance ecosystem. Designed to maintain a stable value against the US dollar, it plays a central role in decentralised finance by enabling payments, lending, and risk management without reliance on traditional banks.
This review explains how DAI works, why it matters, and how it compares to other stablecoins from a structural and strategic perspective.
What is DAI
DAI is a decentralised stablecoin issued through smart contracts on public blockchains. Unlike fiat-backed stablecoins, it is not directly backed by cash reserves held by a single institution. Instead, it is generated through overcollateralised positions using crypto assets.
The system is governed by the decentralised organisation MakerDAO, whose community sets risk parameters, collateral types, and system rules through on-chain governance.
The objective is simple. Keep DAI close to one US dollar while remaining censorship-resistant and transparent.
How DAI maintains its stability
DAI stability relies on a combination of economic incentives, collateral management, and governance.
Users lock collateral such as Ether or tokenised real-world assets into smart contracts called vaults. In return, they can generate DAI up to a defined collateral ratio. If the value of the collateral falls too far, positions are liquidated to protect the system.
Stability mechanisms include interest rates on borrowing, known as stability fees, and savings rates for DAI holders. These tools influence supply and demand, helping keep the price near its target.
Unlike algorithmic stablecoins that rely purely on market dynamics, DAI combines market incentives with collateral backing and active risk management.
Decentralisation and governance
Governance is a defining feature of DAI. Token holders vote on key decisions, including collateral onboarding, risk limits, and protocol upgrades.
This model distributes control but also introduces complexity. Governance participation tends to be concentrated among large stakeholders, which can affect decentralisation in practice.
Nevertheless, all decisions are transparent and recorded on-chain, offering a level of visibility that traditional financial governance rarely achieves.
Use cases in decentralised finance
DAI is widely used across DeFi applications.
It serves as a base currency for lending and borrowing, enabling users to earn yield or access liquidity without selling volatile assets. It is also used for payments, remittances, and as a unit of account in decentralised exchanges.
Because DAI is not issued by a single corporate entity, it is often preferred in applications that prioritise neutrality and censorship resistance.
Its integration across protocols makes it a key piece of DeFi infrastructure rather than just a standalone asset.
Strengths of DAI
DAI offers several advantages.
First, transparency. All collateral, rules, and system balances are visible on-chain.
Second, resilience. Overcollateralisation and diversified collateral reduce reliance on a single asset or issuer.
Third, composability. DAI integrates seamlessly with other smart contracts, enabling complex financial strategies without intermediaries.
These features make DAI attractive to users seeking alternatives to bank-linked stablecoins.
Risks and limitations
Despite its strengths, DAI is not risk-free.
Collateral volatility remains a core challenge. Sharp market downturns can stress liquidation mechanisms, particularly during periods of network congestion.
Governance risk is another factor. Decisions depend on active and informed participation. Poor governance outcomes can weaken stability or introduce systemic vulnerabilities.
There is also increasing reliance on tokenised real-world assets and centralised stablecoins as collateral. While this improves scalability, it introduces exposure to traditional financial and regulatory risks.
Regulatory considerations
DAI occupies a complex position in regulatory discussions. Its decentralised structure makes it harder to regulate through traditional issuer-based frameworks.
Regulators increasingly focus on stablecoins due to their potential impact on payments and monetary systems. While DAI does not fit neatly into existing categories, it is unlikely to remain outside regulatory attention.
Future rules may shape which collateral types are viable and how decentralised governance is treated under financial law.
DAI compared to other stablecoins
Compared to fiat-backed stablecoins, DAI trades simplicity for decentralisation. It lacks direct cash reserves but avoids dependence on a single custodian.
Compared to purely algorithmic stablecoins, DAI is more conservative. Collateral backing and active governance provide additional safeguards, though at the cost of complexity.
This middle-ground approach explains its longevity in a volatile sector.
Final assessment
DAI remains one of the most important decentralised stablecoins in operation. Its design reflects a deliberate trade-off between stability, decentralisation, and scalability.
For users and developers in decentralised finance, DAI offers a transparent and composable unit of value. For analysts, it provides a useful case study in how financial stability mechanisms can be rebuilt using smart contracts.
As regulation, markets, and technology evolve, DAI’s ability to adapt through governance will determine its long-term relevance. In a sector defined by rapid change, that flexibility may be its greatest strength.
