What is DAI?
DAI is an algorithmic stablecoin pegged to the Untied States dollar that is collateralized by crypto assets. DAI runs on, and is secured by, the Ethereum blockchain as an ERC-20 token. DAI is minted through a process of collateralization, where wallet holders can deposit accepted crypto assets into “Vaults” in exchange for a DAI loan. The amount of DAI loaned is based on the collateralization rates that are set for each accepted crypto asset. For instance, if the collateralization rate is 175% for Bitcoin, users will receive 1 DAI for each $1.75 USD worth of Bitcoin they deposit. To get their crypto assets back, all they need to do is repay the loan by transferring the amount of DAI they borrowed, plus the interest, back to the Vault.
MakerDAO, the organization responsible for DAI, maintains DAI’s peg to USD by employing algorithmic mechanisms that control DAI’s supply and demand. All DAI loans are overcollateralized, which means that borrowers must deposit more than the value of their intended loan. If market volatility causes their collateral to become too risky, the Vault will automatically liquidate their collateral and pay off the debt. Each Vault has a unique risk profile based on the type of collateral crypto asset it accepts and will adjust its collateralization rate and interest rate accordingly. These controls are paramount to ensure that each DAI is fully backed by crypto assets such that the 1:1 DAI to USD peg can be maintained.
Please note that Wealthsimple Crypto clients are not yet able to deposit or withdraw DAI to or from their Wealthsimple account but this feature will be added soon.
What is MakerDAO?
MakerDAO is the decentralized autonomous organization (or “DAO”) responsible for the protocol that makes DAI work. MakerDAO was founded by Rune Christensen in 2015. However, as of July 2021, MakerDAO’s governance was fully decentralized through a DAO governance structure. People who hold MakerDAO’s governance token, called MKR, can make proposals to transfer funds from MakerDAO’s treasury funds or to change the MakerDAO protocol itself. Voting is weighted by the amount of MKR that votes for a proposal. If more MKR votes in favour of a proposal than against, the proposal will be successful.
MakerDAO launched with 1,000,000 MKR tokens. When the Maker protocol detects its running a deficit and the system debt exceeds a maximum specified threshold, new MKR is minted and auctioned in exchange for DAI so that the debt to capital ratio is less risky. When the Maker protocol detects its running a surplus and the system capital exceeds a minimum specified threshold, DAI is auctioned off in exchange for MKR which is subsequently destroyed.
MKR is offered by Wealthsimple Crypto. However, please note that Wealthsimple Crypto clients are not yet able to deposit or withdraw MKR to or from their Wealthsimple account but this feature will be added soon.
How does DAI compare to Bitcoin?
First, Bitcoin is a coin that operates in the Bitcoin blockchain, whereas DAI is built upon Ethereum. Bitcoin powers the Bitcoin blockchain and is mined by a decentralized network of computers that solve complicated puzzles to verify transactions. By contrast, DAI is a token that utilizes the Ethereum blockchain network and its capacity to process complex smart contracts. On Ethereum, ETH is the only coin that can be mined; miners mine ETH to process DAI transactions. It is what is known as an ERC-20 token, the name applied to the generic token standard for the Ethereum blockchain.
Second, Bitcoin’s value fluctuates according to market forces and DAI is pegged to $1 USD. Bitcoin derives much of its value from being a medium of exchange and store of value. Bitcoin has a pre-determined, fixed supply. On the other hand, because each DAI is backed by at least the equivalent of $1 value in crypto assets, the market generally values DAI at $1 USD. However, during periods of significant market volatility, even stablecoins like DAI have experienced deviations of a few cents in market value from their peg.
How does DAI compare to other stablecoins?
DAI is a hybrid of “asset-backed” and “algorithmic” stablecoins. Asset-backed stablecoins generally can be redeemed from the organization operating the stablecoin for a reserve asset, like fiat currency, traditional financial assets, crypto assets, or even commodities like gold. Examples of asset-backed stablecoins include USDC (or “USD Coin”) and PAXG (or “Paxos Gold”). Algorithmic stablecoins generally employ complex algorithms that control the supply and demand of their coins to ensure they’re valued at the peg. This process often involves buying, selling, minting, and destroying the stablecoin’s governance token. Because algorithmic stablecoins are more suitable to on-chain operations, they tend to be more decentralized. UST (or “TerraUSD”) is an example of an algorithmic stablecoin. DAI is fully backed by crypto assets and also employs complex algorithmic mechanisms to control the supply and demand of DAI, including by buying, selling, minting, and destroying of its governance token, MKR, and DAI’s governance is decentralized through the use of a DAO.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about DAI, including an opinion that DAI is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of DAI prior to making it available on Wealthsimple Crypto and has concluded that DAI is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated DAI based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of DAI, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) or issuer(s) that first created DAI;
- The supply, demand, maturity, utility and liquidity of DAI;
- Material technical risks associated with DAI, including any code defects, security breaches and other threats concerning DAI and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them;
- Legal and regulatory risks associated with DAI, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of DAI; and
- The stability, resilience, and structure of the stablecoin.
Like all other crypto assets, there are some general risks to holding DAI. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure.
Stablecoins also present risks distinct from other crypto assets. The mechanism by which a stablecoin seeks to maintain its value is not guaranteed and can present systemic market risk, capital risk, and security risk. DAI’s reserve assets are locked into Ethereum smart contracts and thus DAI holders do not have an insured claim to their DAI.
The DAI team and community are not under any legal or regulatory obligation to disclose material information to the public regarding their activities. Holders of DAI have no recourse to DAI or Wealthsimple if DAI declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading DAI. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: March 8, 2022