DAI is a type of stablecoin in the cryptocurrency world. It was created by the MakerDAO (Maker Decentralized Autonomous Organization) and operates on the Ethereum blockchain. The main goal of DAI is to mitigate volatility through a system of smart contracts which automatically react to market dynamics.
Unlike many other cryptocurrencies such as Bitcoin or Ethereum, whose prices can fluctuate wildly in a short period, DAI is pegged to the US Dollar and is intended to maintain a roughly 1:1 ratio with the dollar. This is achieved through a system of collateralized debt positions (CDPs), into which users deposit some amount of Ether (ETH) in return for a corresponding amount of DAI.
If the value of Ether falls, users are required to deposit more ETH into the CDP to maintain the peg to the dollar. Conversely, if the value of Ether rises, users can withdraw excess ETH from the CDP.
This mechanism allows DAI to provide many of the benefits of cryptocurrencies (such as decentralization, privacy, and borderless transferability), while also maintaining a stable value. This makes it more useful for certain applications, such as loans, savings, or predictable transactions.