Decentralized stablecoins: how DAI and USDS work
Dollar tokens minted by smart contracts rather than companies, and what keeps them at $1.
A decentralized stablecoin such as DAI or its successor USDS is minted by users who lock up more crypto than the stablecoins they create. If a vault's collateral falls too far, the protocol auctions it to repay the debt. A swap facility with USDC and adjustable interest rates help hold the $1 peg. MakerDAO, which runs DAI, rebranded as Sky in August 2024.
Decentralized vs. company-issued stablecoins
USDT and USDC are issued by companies that hold dollars and Treasury bills in reserve. A decentralized stablecoin is created by smart contracts instead: users lock up crypto as collateral and mint new stablecoins against it, and rules voted on by token holders keep the system solvent. The best known is DAI, launched by MakerDAO in 2017, and its successor USDS.
How DAI is minted
You open a vault, deposit collateral such as ETH, and mint DAI up to a limit set by the collateralization ratio. With a 150% minimum ratio, every $150 of collateral can back at most $100 of DAI.
- Deposit 10 ETH at $3,000 ($30,000). At 150%, the most you can mint is $30,000 ÷ 1.5 = $20,000 DAI.
- Mint a safer $12,000 DAI instead. The vault is liquidated if ETH falls to $12,000 × 1.5 ÷ 10 = $1,800.
- To get your ETH back you repay the DAI plus a stability fee (interest). The repaid DAI is destroyed.
Requirements differ by collateral type and are changed by governance; check the live parameters before relying on any number.
How the $1 peg is held
- Overcollateralization and liquidation. If a vault falls below its minimum ratio, the system auctions the collateral to repay the DAI. If an auction doesn't cover the debt, the protocol covers the shortfall from its reserves or, as a last resort, by creating and selling new governance tokens.
- The Peg Stability Module (PSM). Lets anyone swap USDC and DAI at about 1:1, which pins DAI's price closely to $1, at the cost of relying on USDC.
- Interest rates. The stability fee and the savings rate (which pays DAI or USDS holders who deposit them) are adjusted to push demand and supply toward the peg.
From Maker to Sky: USDS
On August 27, 2024, MakerDAO rebranded as Sky. It introduced the Sky Dollar (USDS), launched on September 18, 2024, which any DAI holder can swap for 1:1, and converted MKR governance tokens to SKY at 1 MKR = 24,000 SKY. DAI still exists alongside USDS. According to DefiLlama on November 4, 2026, USDS supply was about $6.5 billion and DAI's about $4.7 billion.
Over the years the backing has shifted from crypto alone to a mix that includes USDC held through the PSM and investments in real-world assets such as Treasury bills, which helps stability but means DAI and USDS depend partly on the same banks and issuers as centralized stablecoins. See tokenized Treasuries.
When it has been tested
On March 12, 2020 ("Black Thursday"), ETH's price fell 43% in a day, from about $194 to $111. Ethereum was congested, liquidation auctions got few bids, and over $8 million of ETH collateral was sold for zero DAI, leaving at least $4.5 million of DAI without backing. Maker was left short of collateral and covered the gap by minting and auctioning new MKR. It then changed its auction system and added USDC as collateral, the start of the PSM approach.
Contrast TerraUSD (UST), an algorithmic stablecoin that wasn't backed by more collateral than its supply but by a mechanism for minting and burning the LUNA token. It collapsed to near zero in May 2022, wiping out tens of billions of dollars. Overcollateralized designs have survived crashes that broke algorithmic ones, though with losses along the way.
Risks
- Liquidation for vault owners when collateral prices fall.
- Peg risk if collateral crashes faster than auctions can work, or if a large reserve asset (such as USDC) fails.
- Governance risk: holders of governance tokens can change fees, collateral and rules.
- Smart-contract and oracle risk, as with all DeFi.
- Not a bank deposit, not insured, no one to call.
Related reading: USDT vs. USDC vs. DAI: how the big stablecoins differ · Oracles: getting real-world data onto a blockchain
Frequently asked questions
What is a decentralized stablecoin?
A stablecoin created by smart contracts against crypto collateral, governed by token holders, instead of issued by a company holding bank reserves. DAI and USDS are the best-known examples.
How does DAI stay at $1?
Every DAI is backed by more collateral than its value, undercollateralized vaults are liquidated, a module lets people swap DAI and USDC near 1:1, and interest rates are adjusted to steer supply and demand.
What is the difference between DAI and USDS?
USDS is the Sky Dollar, introduced in September 2024 when MakerDAO rebranded to Sky. DAI can be swapped for USDS 1:1, and both still exist.
Is DAI really decentralized?
Partly. It's run by smart contracts and token-holder votes, but much of its backing has been USDC and real-world assets, which depend on centralized companies and banks.
Where to next
Sources
- MakerDAO rebrands to Sky, DAI optionally upgradeable to USDS (The Block, August 27, 2024)
- Sky Protocol developer documentation (Sky Ecosystem)
- Stablecoins dashboard and API (DefiLlama)
- What really happened to MakerDAO? (Glassnode, on Black Thursday 2020)
Written for beginners and checked against the sources listed. Last reviewed November 5, 2026. This page is educational and is not financial, tax or legal advice. How we write and check pages.