In the world of cryptocurrency, investors face a constant dilemma: keep assets in cash (stablecoins) to protect against market volatility, or keep them invested to generate returns? In traditional finance, money sitting idle in a checking account erodes against inflation. The exact same principle applies to idle stablecoins in your digital wallet. This is precisely where Savings Dai (SDAI) steps in.
If you are holding DAI in your wallet and those funds aren’t generating revenue while you sleep, you are essentially leaving money on the table. In this guide, we explore this innovative solution from MakerDAO in detail, stripping away the technical jargon to make it accessible to everyone.
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What is Savings Dai (SDAI)? The Core Definition
In its simplest form, Savings Dai (SDAI) is the tokenized representation of DAI deposited into the Dai Savings Rate (DSR) module within the MakerDAO protocol.
To explain this with a traditional banking analogy:
Imagine the cash in your pocket (DAI). You deposit this cash into a time-deposit account at a bank. The bank issues you a “certificate of deposit” proving that your money is there and earning interest. That certificate is SDAI.
However, the key difference lies in decentralization: SDAI is completely decentralized, can be redeemed at any time, transferred to other wallets, and even used as collateral in other DeFi protocols.
Why is it Called “Savings”?
It is named “Savings” because SDAI accrues a share of the revenue generated by the MakerDAO protocol (from sources such as loan interest and Real World Asset investments). As long as you hold SDAI, your underlying DAI balance continuously grows based on the interest rate determined by the protocol.
How Does SDAI Work? (The Mechanism)
Understanding the mechanics of SDAI is key to understanding its popularity. Unlike many “yield” tokens, SDAI does not increase the quantity of tokens in your wallet (it does not rebase). Instead, its value increases.
The system operates as follows:
- Investment: You lock your 1,000 DAI into the smart contract via an interface like Spark Protocol.
- Conversion: The protocol issues you the equivalent amount of SDAI based on the current exchange rate.
- Appreciation: Let’s assume the DSR (Savings Rate) is 5% annually. As time passes, the value of 1 SDAI increases relative to DAI.
- Exit: When you wish to redeem your SDAI for DAI, you receive your initial principal plus the interest accrued within the system.
Example Scenario:
Today, let’s say 1 SDAI = 1.10 DAI.
You deposit 1,000 DAI and receive approximately 909 SDAI.
A year passes, interest accrues, and the rate becomes 1 SDAI = 1.20 DAI.
When you redeem your 909 SDAI, you don’t get 1,000 DAI back; you receive approximately 1,090 DAI.
The number of SDAI tokens in your wallet remained constant, but their purchasing power (the underlying DAI amount) increased.
Differences Between DAI and SDAI
The distinction between these two tokens is often a point of confusion for investors. The table below clarifies these differences:
| Feature | DAI (Stablecoin) | SDAI (Savings Dai) |
| Price Stability | Always attempts to peg to $1.00. | Its value continuously increases relative to DAI. |
| Passive Yield | Generates no yield while sitting in a wallet. | Earns interest at the MakerDAO DSR rate. |
| Use Case | Trading, medium of exchange, payments. | Savings, collateral, long-term holding. |
| Transfer | Fully transferable. | Transferable (transfers the right to the yield). |
What Are the Advantages of Using SDAI?
Why go through the trouble of converting to SDAI instead of just holding plain DAI? Here is why professional investors prefer SDAI:
1. Protection Against Inflation (USD Based)
When the crypto market is in a bear cycle or when you simply want to sit in cash, SDAI ensures your funds earn a return comparable to US Treasury Bills rather than sitting idle. MakerDAO can offer this yield because it invests a significant portion of its collateral into secure Real World Assets (RWA).
2. DeFi Lego Blocks (Composability)
Previously, earning interest in MakerDAO required locking your funds in a “vault,” making them unusable elsewhere. SDAI, however, is a standard ERC-20 token. This means you can take your SDAI to another DeFi protocol (such as Aave or Morpho), use it as collateral, and borrow against it. This maximizes capital efficiency.
3. Transferable Yield
When you send SDAI to someone else, you are also transferring the right to the accrued interest. This opens new doors in the world of payments and settlements.
4. Low Gas Fees (Gnosis Chain & L2)
SDAI is not limited to the Ethereum mainnet; it is widely available on networks with lower fees, such as Gnosis Chain. In fact, DAI bridged to Gnosis Chain can be automatically converted to SDAI to generate yield.
How to Buy SDAI (Step-by-Step)
There are essentially two ways to acquire SDAI: Direct “Minting” or purchasing from an exchange.
Method 1: Spark Protocol (The Official Route)
MakerDAO’s official interface, Spark Protocol, is the most secure way to obtain SDAI.
- Connect your wallet (MetaMask, Rabby, etc.) to the Spark Protocol app.
- Navigate to the “Savings” tab.
- Enter the amount of DAI you wish to deposit.
- Confirm the transaction (First approve DAI spending, then confirm the swap).
- Congratulations, you now hold SDAI in your wallet.
Method 2: Decentralized Exchanges (DEX)
If you prefer not to use the Spark interface, you can swap DAI for SDAI on exchanges like Uniswap, Curve, or Balancer, just as you would with any other token. This method can sometimes be more advantageous in terms of gas fees.
Risks and Considerations
No financial instrument is entirely risk-free. Although SDAI is a “stablecoin derivative,” there are risks you must be aware of:
- Smart Contract Risk: While MakerDAO and Spark Protocol are among the oldest and most trusted structures in DeFi, a bug in the code could potentially lead to a loss of funds.
- DAI De-peg Risk: The value of SDAI is intrinsically linked to DAI. If DAI loses its peg to the dollar (de-pegs), SDAI will also lose value in dollar terms.
- Interest Rate Volatility: The DSR (Dai Savings Rate) is not fixed. MakerDAO governance (MKR holders) can vote to lower or raise this rate based on market conditions.
Summary: Who is SDAI Suitable For?
SDAI is not designed for day traders, but rather for “HODL” investors and corporate treasury management. If you are:
- Sitting in dollars to avoid market uncertainty,
- Saving for the long term and want to benefit from compound interest,
- Looking to actively utilize your capital within the DeFi ecosystem,
Then SDAI should be an indispensable part of your crypto portfolio.
SDAI is one of the finest examples of programmable money. It is not just a store of value; it is a self-growing “digital savings account.”
