If you have never heard of Dai token (DAI), you are not alone. Dai is currently one of the world’s most overlooked stablecoin projects. However, all of this might be about to change. This is thanks to an explosion of interest in Dai, following a recent Dai Coinbase Earn debut.

What is Dai Token?

At face value, Dai is a stablecoin similar to Tether (USDT). One Dai token is always worth one USD. Like with Tether, users can, therefore, offset cryptocurrency market volatility by buying Dai with other digital assets, in advance of other assets depreciating in value.

Unlike Tether, though, Dai can also be used to create collateralized debt positions (CDPs). These allow users to lock supported cryptocurrencies in Ethereum smart contracts, before borrowing an almost equivocal amount of Dai tokens to spend and invest as they please.

How Dai Token Works

How Dai works is simple. Dai is an Ethereum based ERC20 token which can be purchased with Ethereum. However, as well as simply exchanging ETH for DAI, users can deposit Ethereum they own into a smart contract, before borrowing (instead of buying) an almost equivocal amount of Dai tokens.

• If Ethereum is priced at $100, a user can lock the likes of 1 ETH into a DAI CDP smart contract.
• An almost equivocal number of Dai tokens are then released which a user can spend or invest as they please.
• To later unlock deposited ETH from a smart contract, a user will only ever need to pay back the equivalent of $100 (plus interest), even if ETH climbs to as high as $1,000 or more in value during the interim.

DAI CDP Examples

In simple terms, someone who owns 1 ETH currently valued at $100, can create a Dai CDP to borrow an almost equivocal amount of Dai tokens. A user can then use their Dai to buy an equivocal amount of another cryptocurrency like Bitcoin.

If purchased coins like Bitcoin rise in value, investors can make gains and buy back their original ETH at any time for the equivalent of $100. (Even if ETH prices are later higher.)

Purchased coins like Bitcoin could, of course, fall in value, as could the price Ethereum. However, by only ever having to buy back ETH at the price it was originally deposited into a CDP at, Dai users can use Dai to minimize trading and investing risks.

How a Dai Coinbase Earn Course Just Put Dai on Investors Radars

Up until recently, relatively few cryptocurrency users and investors were aware of the benefits of Dai. However, on June 26th this year, Coinbase Earn launched an educational course explaining how to use Dai and its associated CDP platform.

In reward for completing the Dai Coinbase Earn course, participants were awarded the equivalent of $14 in Dai tokens. Since this time, it has been revealed that 17,620 new ETH/Dai CDPs have been created. This compares to just 858 CDPs created in June before Coinbase Earn drew attention to Dai.

Are There Any Risks Associated with CDPs?

CDPs are a fantastic way to unlock liquidity from cryptocurrency holdings. However, there are certain risks involved. Unlocked liquidity is loaned from the Dai Maker network, and this loan does have to be repaid with interest.

Dai interest rates increase in tandem with how much liquidity users unlock from deposited cryptocurrencies. It is also the case that if loans are not repaid or the level of risk that CDP loans will not be repaid increases, deposited cryptocurrencies can be liquidated by Dai, to make up for the shortfall.

In effect, CDPs are very similar to margin trading. In every case, anyone thinking about creating a Dai collateralized debt position should, therefore, make sure that they understand the full risks involved with doing so.