Dai

Dai is generated by locking collateral worth more than the Dai created against it, with liquidations enforcing that ratio automatically. No issuer holds dollars in a bank — the backing is on-chain and verifiable at any moment, which is the property that distinguishes it from every fiat-backed token.

Overcollateralisation replaces trust with margin

To create Dai you lock collateral exceeding the debt, and if its value falls towards the debt the position is liquidated automatically. Solvency is maintained by margin and market mechanics rather than by an issuer's balance sheet. You can verify the backing yourself rather than reading an attestation about it.

Liquidations are the failure point

The mechanism depends on liquidators being able to buy seized collateral fast enough. During the March 2020 crash, network congestion caused auctions to clear at near zero and left the system undercollateralised — the shortfall was covered by auctioning governance tokens. That is the design working through its worst case, and it is what to model rather than the steady state.

The collateral is no longer purely crypto

A substantial share of backing now comes from real-world instruments held through legal structures, plus other centralised stablecoins. This improved stability and yield and moved the risk closer to the traditional financial system. Anyone choosing Dai for censorship resistance should read the current composition rather than the original design.

The savings rate is monetary policy

Holders can deposit Dai to earn a rate set by governance and funded from protocol revenue. Raising it attracts demand and costs the protocol; lowering it does the reverse. It is a deliberate policy lever, voted on in public.

Where it fits

Dai suits users who want a dollar whose backing they can inspect on-chain and who accept exposure to the collateral mix governance has chosen. Users wanting purely crypto backing should check what secures it at the time they buy rather than assuming.