Stable coins as the name implies are cryptocurrencies that have stability as their primary feature.
They are pegged to the value of another asset and will maintain the value of that asset through time. This is done to ensure equilibrium in the market. All these stable coins share something in common and that thing is that it is up to the issuing authority to maintain the peg. They need to ensure that the supply of US dollars is equal to the supply of the stable coin.
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DAI
DAI is a completely decentralized stable coin pegged to the value of one dollar.
DAI was set in motion in 2017, and the folks of Maker DOA were its developers.
Maker is the decentralized autonomous organization that was built on the Ethereum blockchain.
Source
They were trying to develop a decentralized stable coin which would be tied to other assets. They developed two coins which were the Maker and the DAI stable coin both of which were of the ERC20 standard.
These developers are in charge of the risk management of the DAI ecosystem. They make essential decisions that relate to DAI issues such as the parameter for risk management, the target rates and much more.
Being that DAI is an ERC20 token, it can be stored and transfered like every other Ethereum based token. A coin that will always be equal to one dollar, privately controlled by the person that HODL's it, without the backing and reserve of any third party.
HOW DAI MAINTAINS IT'S PEG
The careful balance of economic incentives aids DAI to maintain its peg.
The system creates risk-free opportunities everytime there is a deviation from the one to one peg.
DAI can be borrowed by simply placing cryptocurrency in a vault. Users lock ETH in the vault to unlock DAI. The DAI can also be sent back together with the fee to enable them unlock the collateral they posted. This can be hassle-freely managed in the vault through the use of decentralized smart contract.
ETH holders can use their crypto to generate DAI for the rate of one dollar. If the exchange market sells DAI for more than one dollar, then a user can quickly unlock the DAI and sell it for a quick profit.
For example, DAI is trading for $1.07 dollars on coinbase, a user can quickly create DAI by sending ETH to the vault. Once the DAI is unlocked, just a hit on the sell button will give a profit $0.07. This incentive mechanism means that the supply of DAI is auto adjusted to reflect pricing differences. By unlocking DAI to be sold in the market, supply is being increased.
This mechanism also works in the reverse. If the price of DAI fall below the one dollar peg, someone that borrowed DAI can buy it and use it to unlock their ETH on the vault. The borrowed was at the rate of one dollar and it is now paid below the borrowed price.
Example, if DAI is trading in the exchange market for $0.85, DAI that initially cost $1 in the open market has now reduced to $0.85 when the market is closed, and a $0.15 profit less stability fee is gained.
DAI COLLATERAL
When the DAI stable coin was first initiated, the collateral required was Ethereum. This made it possible for the locking up of ETH to unlock DAI. But after months of planning, they came with another medium called Multi Collateral DAI (MCD). The main benefit is so that more than just ETH can be used as collateral in the vault.
Single collateral DAI (SAI) holders can easily upgrade to the MCD.
The main difference between SAI and MCD is that with SAI stability fees paid can only be paid with the Maker tokens, but with MCD, stability fees can be paid with other tokens.
DAI SAVINGS RATE (DSR)
This is a medium that allows DAI holders to earn returns from their stable coin. These returns are sourced from the stability fees paid by other Maker holders, and it acts as media to balance up the Maker ecosystem.
HOW THE DAI RETURNS ARE EARNED
This is easily done using the Maker DeFi app. The DeFi app puts forth three key features into one user-experience. These features are;
- Trading using DAI
- Borrowing using DAI
- Saving using DAI
Trading using DAI is a decentralized exchange that allows trading of DAI for other ERC20 tokens and some stable coins like USDT stable coin.
Borrow using DAI allows users to create vault and unlock DAI. Ethereum for example can be borrow by locking up DAI.
Saving using DAI allows user to lock up their DAI and earn profit should there be rise in the market price.
Metamask is one of the best wallet for trading, borrowing and saving
DAI has a good liquidity and track record which which makes it one of the leading stable coins even though it is not 100% risk free, but to some degree, it is.
Thank you Prof. @yohan2on for looking through my task.
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