Dai (DAI) is a stablecoin that is tied to the US dollar. MakerDAO, its decentralized governing community, and its exceptionally high security all influence DAI's value.

What is $DAI?

Dai (DAI) is a stablecoin that is tied to the US dollar. MakerDAO, its decentralized governing community, and its exceptionally high security all influence DAI's value. DAI can be acquired with fiat money (such as US dollars) on most regulated cryptocurrency exchanges (CEX), including: Binance, Uniswap, Coinbase, KuCoin, Kraken and more.

For more information about what a stablecoin is, check our article: What are stablecoins?

What makes $DAI so good?
There are a number of systems in place to keep the DAI price steady against the US dollar. At its most basic level, it is a network of interconnected smart contracts that use automatic feedback to maintain stability. It also enabled the development of the first effective decentralized margin trading platform. By constructing a CDP smart contract, each user pledges his assets as collateral for a loan. The user receives the amount in DAI comparable to the current market value in US dollars as soon as the funds are withheld. And, like any other cryptocurrency, you may use these coins to make payments, invest, and utilize as a personal savings account, among other things.

Because DAI is explicitly connected to the US dollar, you will only be able to refund the base amount spent plus interest (after all, it's like borrowing a coin). Simply told, if you donated roughly 2 ETH in 2020 to the CDP, you would have received 100 Dai. When the time had come to return it, you must've had returned the same 100 DAI plus interest, and only then would you have be able to utilize your ETH again. Other methods, on the other hand, allow you to operate with unstable coins, but because of their high volatility, you may need to pay nearly twice as much as the down payment. Assume you contributed 10 AssetCoins in exchange for the right to sell 100 NonStableCoin (NSC) at the current market price of $4. If the price falls to $2, you will have to pay 200 NSC plus interest to repay the loan. As you can see, this can be highly rewarding for investors.

Initially, DAI only allowed the option of making a 1 ETH commitment. PETH, as it was known. To obtain this coin, you must've first deposited a specific sum of ETH into the CDP smart contract. The premise was that even when the Ethereum market dropped sharply, a secured debt position retained a higher value than the user's debt. At the very least, more than your collateral. In this situation, the producer restricted the supply of PETH in order to re-capitalize the market, raising demand and, as a result, the price of DAI. This had a favorable impact on CDP's current situation.

How does it tie into Regulation?
The Target Rate Feedback Mechanism is the fundamental mechanism that turned DAI into a stablecoin (TRFM). The system is fully automated. Here's the deal: Yes, 1 DAI is equal to $1, but this ratio changes as the cryptocurrency market moves. If the price of a cryptocurrency declines, for example, the TRFM mechanism adjusts the equilibrium to encourage its value to rise. Prices are increasing, making DAI manufacturing via CDP more expensive. At the same time, cryptocurrency owners get additional profit, increasing demand for the currency. A decrease in supply and a subsequent gradual decrease in the target rate to a base level of $1 correspond to higher demand. TRFM and the target rate, in other words, are decided by market supply and demand dynamics. Simultaneously, the manufacturer's regulators can define the target feedback mechanism's "sensitivity," or how sharp the reaction to the course adjustment should be. Assume that the "10 percent in 15 minutes" criterion is set, and the goal rate is unable to change the current market price by more than 10% in 15 minutes. For an hour, that represents a 40% discount. This is vital to allow enough time to begin a worldwide settlement with the targeted influence of someone who has taken control of the majority of posts.
This, however, necessitates users' ongoing and real-time interaction with the platform. Only this ensures that automatic procedures work properly and that collateral in the CDP is kept above the level of accumulated debt. If the assets in the CDP start to be regarded dangerous, the regulator may decide to liquidate them.

MakerDAO wants to make its work as safe and predictable as possible, just like any other organization. There are, however, possible dangers. The stablecoin mechanism, on the other hand, is constantly changing, ensuring the Ethereum and other ecosystems long-term viability. We think, sooner or later we will see the use of StableCoins as a whole, in our day to day life.

Written By

Petrache Ionut

Jun 14, 2022