What is the difference between single-collateral and multi-collateral Dai?

Understanding Single-Collateral Dai

1. Single-Collateral Dai (SCD) was the original version of the Dai stablecoin launched by MakerDAO in 2017.

2. It allowed users to generate Dai by locking up only one type of collateral: Ether (ETH).
3. The system operated through a mechanism called the Single-Collateral Dai Vault, where users deposited ETH into a smart contract to borrow Dai.
4. Because it relied solely on ETH, the system was more vulnerable to volatility in the Ethereum market.
5. Regulatory and technical limitations restricted the expansion of supported assets under this model.

The Evolution to Multi-Collateral Dai

1. Multi-Collateral Dai (MCD) was introduced as an upgrade to address the limitations of SCD.

2. MCD allows multiple types of digital assets to be used as collateral, including but not limited to ETH, BAT, USDC, and other ERC-20 tokens approved by governance.
3. This diversification reduces systemic risk by not relying exclusively on one asset’s price stability.
4. The transition enabled better capital efficiency and broader access to decentralized lending.
5. A key innovation was the introduction of the DAI Savings Rate (DSR), allowing holders to earn interest directly on their Dai balances.

Risk Management and Governance Implications

1. With multiple collateral types, each asset comes with its own risk parameters such as stability fees, liquidation ratios, and debt ceilings.

2. MakerDAO’s decentralized governance system plays a crucial role in setting and adjusting these parameters through voting by MKR token holders.
3. Risk models are continuously evaluated to ensure that undercollateralization does not threaten the peg of Dai to the US dollar.
4. Oracles provide real-time price feeds for each collateral type, enabling accurate valuation and timely liquidations when necessary.
5. The flexibility of MCD has allowed the protocol to adapt quickly to changing market conditions and user demand.

Impact on the Broader DeFi Ecosystem

1. The shift from single to multi-collateral architecture significantly boosted Dai’s adoption across decentralized applications.

2. Lending platforms like Aave and Compound integrate Dai as both a borrowing and lending asset due to its reliability.
3. By supporting various collateral types, MCD lowered entry barriers for users who do not hold ETH but possess other qualifying crypto assets.
4. Cross-chain expansions and layer-2 integrations have been facilitated by the modular design of the MCD system.
5. Increased trust in Dai’s stability has led to its use in payments, remittances, and even institutional treasury management.

Frequently Asked Questions

What happened to the original Single-Collateral Dai system?The SCD system was officially sunsetted after the migration to MCD. Users were required to migrate their CDPs (Collateralized Debt Positions) to the new Multi-Collateral Dai system. Legacy CDPs no longer exist on the current Maker protocol.

Can any cryptocurrency become a collateral type in Multi-Collateral Dai?No. Only assets approved through MakerDAO’s governance process can be added as collateral. Each proposed asset undergoes rigorous risk assessment, including analysis of liquidity, decentralization, and market maturity before being accepted.

How is the value of Dai maintained at $1 with multiple collaterals?Dai maintains its peg through a combination of overcollateralization, dynamic stability fees, arbitrage incentives, and active governance oversight. When Dai trades above or below $1, market participants are incentivized to act—either generating more Dai or paying back debt—to bring it back in line.

Are there differences in liquidation processes between SCD and MCD?Yes. In SCD, only ETH could be liquidated when collateral ratios dropped too low. In MCD, each collateral type has its own liquidation mechanism, thresholds, and penalty structures tailored to its specific risk profile, managed via separate vault types known as Collateralized Debt Positions (CDPs) per asset.