DAI
A decentralized, crypto-collateralized stablecoin pegged to the US dollar, created by the MakerDAO protocol. Unlike USDC or USDT, DAI is not backed by fiat reserves — it is minted by users who deposit cryptocurrency as overcollateralized collateral into Maker vaults. DAI maintains its peg through algorithmic interest rates and liquidation mechanisms.
“To mint 1,000 DAI, you might deposit $1,500 worth of ETH into a MakerDAO vault. If ETH's price falls and your collateral ratio drops below 150%, your vault gets liquidated.”
Stablecoin
A cryptocurrency designed to maintain a stable value relative to a reference asset, typically the US dollar. Stablecoins provide a way to hold value and transact in crypto without exposure to price volatility. The three main types are: fiat-backed (USDC, USDT — backed by dollar reserves), crypto-backed (DAI — overcollateralized with crypto), and algorithmic (maintaining peg through algorithmic supply mechanisms).
Overcollateralization
The practice of depositing collateral worth more than the value of a loan to provide a safety buffer against price volatility. In DeFi, most lending protocols require overcollateralization because there is no credit scoring — the excess collateral protects lenders if the borrower's collateral loses value. Typical ratios range from 110% to 200%+.
DAO (Decentralized Autonomous Organization)
An organization governed by smart contracts and token-holder votes rather than traditional management hierarchies. DAOs enable collective decision-making on protocol upgrades, treasury allocation, and strategic direction without centralized leadership. Proposals are submitted on-chain and executed automatically if they pass a vote.
Collateral
Cryptocurrency assets pledged as security for a loan in DeFi protocols. Borrowers deposit collateral that exceeds the loan value (overcollateralization) to protect lenders from default risk. If the collateral's value falls below a certain threshold relative to the loan, it can be automatically liquidated.