On-Chain crypto analytics insight: DAI stablecoin ecosystem

DigiEx by Shondy Sainthea
5 min readJun 26, 2022


What are Stablecoins?

Stablecoins are a niche part of the ever-growing crypto ecosystem, primarily used by crypto investors as a practical and cost-efficient way to transact in cryptocurrency. The invention of stablecoins in the crypto ecosystem is brilliant because of the following properties:

  • Similar to the fiat currencies used in model economies, stablecoins provide stability in price for people transacting across digital currencies or between fiat and digital currencies.
  • Stablecoins are native crypto tokens that can be transacted on-chain in a decentralized manner without involvement of any central agency.

With the growing adoption of cryptocurrencies by investors from the TradFi world, stablecoins have become a natural exchange medium between the traditional and crypto financial worlds.

What is DAI

DAI is an algorithmic stablecoin issued by MakerDAO, an Ethereum-based protocol, that seeks to maintain an exact ratio of one-to-one with the U.S. dollar. It is primarily used as a means of lending and borrowing crypto assets without the need for an intermediary — creating a permissionless system with transparency and minimal restrictions. Unlike most stablecoins, which are collateralized against a single fiat currency or cryptocurrency, DAI can use different cryptocurrencies as collateral.

Algorithmic stablecoins

image provided by cointelegraph

The defining characteristic of a pure algorithmic stablecoin is the absence of collateral. Instead , the designer issues two assets (sometimes even three). One asset is the stablecoin, which we assume is pegged to the US dollar. The second asset is a bond that is redeemed for stablecoins at a future date. We call this bond the “stablecoin bond”.

The basic stability mechanism of an algorithmic stablecoin works as follows. If the demand for the stablecoin increases, its price also increases. To maintain the peg to the US dollar, the issuer creates additional stablecoins. These additional stablecoins are either airdropped or used to redeem any outstanding stablecoin bonds. Increasing the supply of an algorithmic stablecoin in such a way will eventually reduce its price.

If demand decreases, the issuer creates additional stablecoin bonds and sells them against the stablecoin to reduce the quantity of stablecoins in circulation. The stablecoin bond is a promise to future stablecoins; that is, algorithmic stablecoins attempt to stabilize a falling price by promising to increase the stablecoin supply in the future to incentivize agents to buy the stablecoin bonds, they are sold at a discount. The discount is determined by market forces.

Collateralized stablecoins: on chain

The working of a collateralized stablecoin with onchain collateral is best explained by the DAI stablecoin, which is pegged to the US dollar. The DAI stablecoin is an ERC-20 token and is based on a set of smart contracts on the ethereum blockchain. Everyone can generate new DAI tokens. To do so, a user must send ether the native crypto asset of the ethereum blockchain-to one of the smart contracts. These funds serve as collateral for a loan in DAI. The interest rate is called the stability fee and DAI loan is called a collateralized debt position (CDP).

Supply and demand in the DAI stablecoin system

fundamentally , agents with different risk attitudes are at the origin of the aggregate demand and the aggregate supply of the DAI stablecoin.

Aggregate supply for DAI: agents who want to increase the risk of their portfolios of crypto assets can use the DAI stablecoin to leverage their portfolios as follows. They can borrow DAI stablecoins and sell the newly created DAI for ether or any other price volatile cryptocurrency (leverage), This increases risk exposure.

Aggregate demand for DAI: agents who want to reduce the risk in their portfolios of crypto assets can sell any price volatile cryptocurrency for DAI stablecoin. This decreases their risk exposures.

Thus, transfer of risk at the origin of the aggregate demand and the aggregate supply of DAI stablecoin. Since demand and supply can shift in unpredictable ways, there is a need for a mechanism that stabilizes the DAI price.

Collateralized stablecoins: off-chain

Stablecoins based on off-chain collateral use, regular bank accounts or other forms of centralized custody to hold the collateral. By far the largest and best known stablecoin using off-chain collateral is tether, which is pegged to the US dollar. Tether was founded in 2014 and is associated with the hong kong based exchange bitfinex. The history of tether stablecoin reveals the main issues that arise with off-chain collateral: namely the lack of transparency, absence of censorship resistance, and lack of profitability.

Stablecoin outlook

Collateralized on-chain stablecoins such as DAI offer many benefits. They are useful for machine to machine payments, in smart contracts, and in some cases even atomic cross-blockchain transactions. Currently, we can see the first designs, and it is possible that many of them fail. However, because a price stable crypto asset has so many benefits, blockchain enthusiasts will keep innovating relentlessly until they find a working design.

DAI Exchange Reserve ( All Exchanges )

image provided by CryptoQuant

The chart displays the total number of coins held in the exchange. As the values continue to rise in reserve, it indicates higher selling pressure and has shown an opposite trend in price in general. (For stablecoin, value rise indicates buying pressure). For derivative exchange, since coins could be used to open both long/short, a rise in reserve values indicates possible high volatility.

DAI Exchange Netflow ( Total All Exchanges )

image provided by CryptoQuant

The chart displays the Netflow total of all exchanges. The difference between coins flowing into and out of the exchange. (Inflow — Outflow = Netflow). Positive value indicates reserve in increasing. For spot exchange, high value indicates increasing selling pressure. For derivative exchange, high value indicates possible high volatility.

DAI: Tokens Transferred (Total)

image provided by CryptoQuant

The chart displays the total number of DAI coins transferred.

DAI: Minted Supply

Image provided by CryptoQuant

The chart displays the total minted supply of the token. As you can see december 12 of 2021 the supply had a high of approximately 7,600,000,000 minted supply.

The data and analytics are provided for information purposes only. I am not a financial advisor. You should consult your financial advisor before you make financial decisions based upon the data or analytics. Your use of Data and Analytics is at your own risk.




DigiEx by Shondy Sainthea

I'm Shondy Sainthea and I welcome anyone to come learn with me about Blockchain,Digital assets and technology.(educational purposes only)