At the surface, Dai is an collateral-backed decentralized stablecoin pegged to the US dollar.
But Dai is not any ordinary stablecoin. In fact, Dai features a number of unique attributes that differentiates it from other similar assets.
Let’s take a glance .
Since the stablecoin is decentralized, by the very definition there’s no central entity controlling the underlying mechanisms of Dai.
Additionally, as Dai exists by utilizing the potential of the decentralized Ethereum network, value are often transferred via Dai with none middleman, which isn’t possible in traditional finance.
The entire network is controlled by preset rules and therefore the relationship between Dai, Ethereum, and therefore the Maker token (MKR).
Economic incentives play a task too – correct actions are financially rewarded, which ensures the network is maintained.
Dai are often sent anywhere within the world with minimal fees. you only need to pay the gas on the Ethereum network. There also are no restrictions. you’ll send your money whenever you would like , to wherever you would like .
The records of Dai are immutable and stored on a blockchain. What’s more, Dai utilizes smart contracts to stop bad actors from exploiting the system.
How it works
Dai is predicated on the Ethereum network. because it stands, Ethereum (ETH) is employed as collateral for Dai. Maker is functioning on Multi-Collateral Dai which will significantly upgrade the Dai system by increasing collateral options.
How Dai remains stable
The price of Dai remains stable through the creation and destruction of Dai supply in unison with supply and demand levels. However, the availability isn’t managed during a seigniorage share system like other stablecoins.
Dai manages supply and demand through economic incentives. When the worth is above 1 USD, anyone can create Dai and sell it for quite it’s worth. This increases the availability and causes price to fall back to 1 USD.
Likewise, when the worth of Dai is below 1 USD, users pays off debt within the system at a less expensive rate, as they will buy Dai for below 1 USD but pay off debt at the fixed rate of 1 USD. The Dai wont to pay off debt is burnt, reducing supply and increasing price.
The mechanics behind it all
Dai are often created by anyone. All you’ve got to try to to is take ETH and use it as collateral. ETH is locked during a smart contract, creating something called WETH (Wrapped ETH), which is then moved into a collateral pool, at which point WETH becomes PETH (Pooled ETH).
Once PETH is made the user can create what’s referred to as a collateralized debt position (CDP). This locks the PETH during a smart contract and creates Dai.
A user cannot prolong an equivalent dollar amount as they put in. Instead, as Dai is made against the collateral PETH, a risk ratio of debt is made . The less Dai drawn out, the higher this risk ratio is.
The network features a risk ratio limit to stop quite a particular amount being drawn out against the collateralized ETH.
Having a far better risk ratio is favorable as users are penalized for having risky debt over a particular limit.
Dai contributors are economically incentivized to settle risky debt. Once the risk-ratio threshold is reached, Dai contributors are allowed to shut the debt on behalf of another user and earn a profit.
As such, once risk reaches a particular level it’ll be closed by other Dai contributors to earn money and maintain the integrity of the system. If your debt is closed, you’re penalized.
If the worth of ETH falls, the extent of risk increases, approaching the danger threshold. As a user with a risky CDP, you’re ready to add more collateral to avoid the penalty.
The Maker (MKR) token
MKR is that the Maker Token. It works in tandem with Dai to assist maintain the network and keep the worth stable.
MKR holders can vote on various issues within the network. for instance , the risk-ratio intensity is set by MKR token holders, which controls when a private is penalized for having a too risky CDP.
MKR holders also can vote on what’s called a ‘global settlement’. within the event that the system faces problems, it are often pack up and Dai holders reimbursed their collateral, in proportion to internet asset value.
Any loan fees are paid in MKR. Loans have a tenth annual fee, paid in MKR. the half of fee is predicated on the worth of the Dai minted, not the collateral. Once MKR is collected for fees it’s burnt, which reduces the availability of MKR.