The DAI is a revolutionary stablecoin that was created via the Makers DAI Stablecoin System. The coin uses margin trading to preserve its value against major fiat coins. Unlike popular stablecoins whose value is backed directly by dollar reserves, this stablecoin’s value is backed by collaterals, which are publicly available on the Ethereum.
Understanding the DAI
The DAI is a stablecoin that was created by MakerDAO. Its value is pegged to the dollar on a 1:1 ratio. DAI value to the USD is maintained without having a central trust in a very interesting manner. The value shifts based on market changes, which allows it to maintain a stable price against other crypto coins. To achieve this, the Maker platform, MKR tokens, and smart contracts called CDP are used amongst other mechanisms.
This eliminated the need for a central body to oversee its fiat reserves unlike happens with Tether USDT. The project is fully based on Ethereuum and its smart contracts. This makes it a trustless stablecoin, which does not have the risk of ever being shut down.
The benefits of the DAI:
- Its value is always going to be $1
- No central authority can shut down the coin
- No one controls the DAI
- Like other crypto coins, it does not require a middleman
- It is freely traded
How the DAI Maintains a Constant Value
The creators of the DAI based its stability on game theory. It balances economic incentive carefully to sustain is value. When DAI value falls below the set $1, various incentives force users to raise their value and vice versa. In these situations, players in the market working rationally can make money during price swings. The more the DAI shifts away from $1, the better the incentives to take its value back to $1. In short, their stable price is due to margin trading that is reliant on trading ETH with collateralized debt positions.
How to Create DAI
Since it is collateralized with ETH, any holder of ETH can create DAI via the MakerDAO Dapp. First, a user sends Ether to the CDP. The CDP smart contract runs on Ethereum and it governs how the DAI are issued. Once you get the DAI for your ETH, you can only get your ETH back by repaying the DAI you borrowed.
The DAI is essentially a loan that you take against Ethereum. Using the DApp, users of ETH can get DAI loans using their holdings. The process involves converting the ETH into WETH tokens. The WETH are stored in an Ethereum pool that acts as the collateral for DAI tokens called the Pooled ETH. The pooled ETH is locked up, which created a CDP. Users are then free to use their DAI. The CDP debt raise will grow when DAI is created until it hits an upper limit and no more are created.
For most people, there is no need to go through this complex process; the DAI can be bought on exchanges. Some of the exchanges that allow you to trade DAI are Coinhub, Bitfinex, HitBTC, Banco, Gate.io, and Radar Relay.
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