How to stake and earn DAI: Lending rates compared

DAI is a US dollar (USD) stablecoin minted by the decentralised finance (DeFi) platform, MakerDAO. MakerDAO allows users to deposit cryptocurrencies as collateral in return for DAI loans. Launched in 2017, MakerDAO allowed investors to finally experience the immense potential of leveraging cryptocurrency holdings.

DAI manages to achieve something that is nearly impossible, keeping an Ethereum-based token pegged to the US dollar. The token's stability relies solely on market forces, which are driven by the MakerDAO governing community. DAI keeps in line with the US dollar thanks to automatic smart contracts that liquidate positions, incentivising and repressing loan creation and by leveraging the MakerDAO governance token, MKR.

Earn yield on DAI

The easiest way to earn DAI is through an exchange or specialised lending platform. These services lend your DAI to borrowers and pay you with yield (APY) for doing so, similar to a savings account. Although keep in mind that cryptocurrency lending services do not provide the same guarantees as traditional banks, and are not subject to the same rules and regulations.

Use the table below to compare rates on DAI then forecast your earnings using the calculator provided.

What is DAI staking and how does it work?

DAI is a stablecoin, but a stablecoin unlike any other. Perhaps the most well-known stablecoin is Tether. Tether keeps itself pegged to the USD in a very traditional way, by holding equivalent value assets. In theory, every Tether token is supported by a real-world amount of USD, keeping the price stable.

DAI uses a far more dynamic set of protocols to keep its price stable. DAI is unique because it is backed by cryptocurrency collateral. For every loan created, new DAI tokens are minted. When a loan is repaid, the DAI is burned and the collateral is released. Every loan needs to be over-collateralised by 150%. This creates a buffer if the value of cryptocurrency assets depreciates, thus stabiIising DAI. If the value of the collateral falls below 150%, cryptocurrency assets are automatically sold to cover the difference, again stabilising the price of DAI.

Alongside cryptocurrency collateral and automatic liquidations, DAI supply is controlled by stability fees. Stability fees are charged for the generation of new DAI tokens. The fees can be increased or decreased to encourage or discourage loan creation, and can increase and decrease the supply of DAI. This control helps to anchor the value of DAI to 1 USD. If all of the above protocols fail to mitigate liquidations, the MakerDAO platform can also mint and sell the governance token MKR to cover any shortfalls.

The concepts employed by MakerDAO are cutting-edge, hold immense potential and allow DAI to maintain its price stability. However, alongside loan creation, DAI tokens can also be used to earn extra rewards through staking.

Technically speaking, staking refers to locking cryptocurrencies into a "proof-of-stake" blockchain. By doing so it helps to validate transactions and secure the network. However, DAI is not associated with a native blockchain. DAI is associated with the DeFi protocol MakerDAO, which leverages the Ethereum blockchain. In this case, staking can refer to the different ways DAI tokens can be locked away to generate yield.

There are 3 primary ways to stake DAI tokens and each method has distinct advantages and disadvantages.

How to stake DAI

Staking through the MakerDao system – the Dai Savings Rate

The easiest way to stake DAI is via the Dai Savings Rate, or DSR, protocol. The DSR is a native smart contract hosted directly on the MakerDao system. Users can lock DAI into a DSR contract, which will then generate yield at the current savings rate.

The DSR is by far the easiest method of staking DAI. It functions largely like a traditional bank savings account. However, the DSR provides a few extra benefits such as no minimum deposit and the ability to withdraw DAI at any point.

Due to the unique nature of the MakerDao system, the DSR is highly variable. MakerDao governance token holders can vote to adjust the DSR at any time, as it provides another tool for managing DAI stability. By changing the DSR, the community can manipulate the supply and demand of DAI, which then helps to keep the token firmly pegged to the US dollar.

How to stake DAI within MakerDAO

Step 1. DAI's front-end application. Users can access the MakerDAO protocol through DAI's front-end app, which is called Oasis. On the home page click "Open Oasis" in the top right corner.

Step 2. Connect wallet. Once on the Oasis application, you will be prompted to connect your Web 3.0 digital wallet. Select your wallet that contains DAI tokens and follow the prompts.

Step 3. Savings. Once on the Oasis application, click the "Start Saving" box.

Step 4. Dai Savings Rate and set-up. On the next screen click the "Dai Savings Rate" box. You will be prompted to set up your Web 3.0 digital wallet. These steps will ensure your Web 3.0 wallet can interact with the Oasis application.

Step 5. Deposit. Enter the amount you wish to deposit into a DSR contract and click confirm.

Step 6. Confirm. Confirm the transaction through your Web 3.0 digital wallet. Once transferred, your DAI tokens will begin to earn yield at the current DAI savings rate.

Staking through an exchange

DAI can frequently be staked using common exchanges, such as Binance or Coinbase. These exchanges usually promote these services as DeFi staking. This term is slightly misleading as the process of staking through an exchange is by definition centralised.

Despite the misnomer, staking DAI on an exchange provides 2 major advantages. It's quick, and it's easy. There's no need to worry about collateral, wallets or complicated procedures. The annual percentage yield (APY) on an exchange will vary daily, but that's no different than staking using the DSR on the MakerDAO protocol.

Platforms that offer staking

1 - 4 of 4

Name	Product	Deposit methods	Fiat currencies	Cryptocurrencies	Offer	Disclaimer	Link
Binance Savings Binance Savings		Bank transfer (ACH)	33	362			Capital at risk View details	Compare	loading Fetching your data...
Coinstash Cryptocurrency Exchange Coinstash Cryptocurrency Exchange		Bank transfer, Cryptocurrency, PayID	1	769			Go to site Capital at risk View details	Compare	loading Fetching your data...
KuCoin KuCoin		Credit card, Cryptocurrency, Debit card, P2P	5	780	Sign up and earn 500 USDT + bonus gift of 200 USDT in trading coupons + limited time offer of 7,500 USDT in futures trial funds. T&Cs apply.		Go to site Capital at risk View details	Compare	loading Fetching your data...
Crypto.com App Crypto.com App 2.8★★★★★(76)		Bank transfer, Credit card, Crypto.com Pay, Cryptocurrency, Debit card, PayID, Apple Pay	11	311			Read review Capital at risk View details	Compare	loading Fetching your data...

Disclaimer: Star ratings are only displayed for products with 10 or more reviews.

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DeFi lending

True DeFi lending is the most complicated but potentially most lucrative way to stake DAI tokens.

Decentralised finance (DeFi) applications are not controlled by a centralised institution. All protocols are built into the underlying code and govern how transactions work, as in the case of MakerDao. There is no one entity overseeing and regulating the process.

That freedom allows cryptocurrency investors to do almost anything with their assets – buy, sell, leverage and lend. DeFi applications such as decentralised exchanges (DEXs) or lending and borrowing protocols rely on user-supplied liquidity. This liquidity is often collected in the form of liquidity pools. Liquidity pools are a pot of cryptocurrency assets that other users can then trade or exchange with. In return for depositing assets into a liquidity pool, liquidity providers earn a share of all fees collected. Each liquidity pool will have an associated APY, which will vary depending on the demand for tokens in the pool.

To earn yield from DeFi lending, a user will need to find a DAI liquidity pool on either a DEX, such as Uniswap, or a lending protocol, such as AAVE. The liquidity pool will have an associated APY. Once DAI tokens have been deposited into the liquidity pool a user will start earning rewards. Rewards may be received as DAI or as the native cryptocurrency token of the DeFi application.

Note: Liquidity pools on DEXs often contain a cryptocurrency pairing. For example, DAI:ETH. In this example, a user would need to deposit equal amounts of DAI and ETH into the liquidity pool.

How much can I earn with DAI staking?

Staking DAI can be a useful way to earn yield on idle holdings. The amount earned from staking DAI will vary based on the staking method chosen.

Depositing DAI tokens into the DSR on MakerDAO will offer variable returns. These returns have been as high as 8% but also can drop to as low as 0%. Returns from the DSR are governed by holders of the MakerDAO governance token, MKR. It is in the token holder's interest to vary the DSR and maintain DAI's stability.

Lending DAI through another DeFi application can be complicated but potentially more profitable. Potential earnings will be directly correlated to the demand for a chosen DAI liquidity pool. If the demand is high, rewards will increase. As a decentralised stablecoin, DAI is often one of the most sought after cryptocurrencies on DeFi applications.

Unlike other cryptocurrencies, the real-world dollar value will not vary depending on the price of DAI. Theoretically, when withdrawing staked DAI tokens that have accrued yield, the equivalent US dollar value should be higher. This would not be the case when staking a volatile cryptocurrency such as ETH.

Is staking DAI safe?

Each staking method should be chosen based on personal risk and reward inclinations. Staking DAI via the DSR provides a very straightforward method to earn yield. The system is associated with the MakerDAO protocol and should therefore be one of the safest options. However, like all decentralised applications that rely on smart contracts, there are inherent risks.

Smart contracts are programmed by human developers which leaves them open to human error and potential exploitation. As they are designed to be immutable, any malfunctions or manipulations could lead to a loss of funds. In the past, the MakerDAO platform has suffered hacking scares, but to date, no funds have ever been taken.

Depositing DAI in a centralised exchange is also relatively safe. These exchanges provide some of the best security in the world due to the inherent risk of digital assets. However, like the DSR, DeFi staking through exchanges also relies on smart contracts.

Although potentially more profitable, lending assets to DeFi applications comes with a greater set of inherent risks. On top of utilising smart contracts, DeFi applications can be extremely interconnected, which creates the risk of cascading failure. Secondly, as most liquidity pools are designed around cryptocurrency pairings (DAI:ETH), their use can sometimes lead to impermanent loss. For more information on the risks associated with liquidity pools, please see our full guide here.

As DAI is a stablecoin, the risks of staking are greatly reduced in comparison to other cryptocurrencies. Some forms of staking can require locking tokens up for a set period. This means that a user can not react to volatile market movements and mitigate a loss in value. Other than DeFi lending, a user does not have to worry about volatile price movements. After accruing additional yield, the staked DAI should increase in real-world value.

Verdict

Staking Dai is an excellent way to increase token holdings and is accessible for most cryptocurrency investors. Depositing tokens through an exchange is likely the easiest way to earn yield, followed closely by locking DAI within a MakerDAO Dai Savings Rate contract. The DSR also allows a user to actively contribute to the stability of the MakerDAO ecosystem. Although returns can be small, they can be stable and are often higher than an average bank account savings rate.

Lending DAI tokens to DeFi applications requires the most expertise and is associated with the most risk. However, by harnessing the volatility of the cryptocurrency markets it can offer lucrative opportunities.