DAI is a decentralized stablecoin launched by MakerDAO in December 2017, pegged to the U.S. dollar. Each Dai is worth $ 1 and will always be worth $ 1 USD. It is designed as a solution to address the problem of price volatility in cryptocurrencies. A stablecoin can be built centralized or decentralized. Centralized stablecoins are generally supported by statutory currencies (USD, EUR, JP ¥, etc.) or commodities and depend on third-party governments or custodians. Decentralized stablecoins are supported by other cryptocurrencies, making them more secure, unauthorized and transparent. Some stablecoin projects use algorithms to fix a constant value.
Unlike Tether and other stablecoins that are supported by legal reserves held in a bank, Dai is entirely built into the Ethereum network as an ERC20 token and supported by Ether, making it completely decentralized. Its stability is supported within the Ethereum blockchain using smart contracts.
How DAI works?
Dai uses game theory and balanced economic incentives to support his $ 1 value. It uses margin trading using the collateral debt position (CDP).
CDP is a smart contract that supports users to receive DAI. It works like a debt instrument with an interest rate. The CDP user has recorded collateral in excess of the loan value in order to secure his debt position. When a Dai drops below $ 1, the system incentivizes users to increase the price. When a Dai is worth more than $ 1 the incentives work the other way around. Dai is completely decentralized. Dai's Stability Commission is voted on by the community of people who hold MKDA token (governance tokens for the MakerDAO system) .
The Stability Commission must be paid by the owners of the CDP. It is an annual percentage return which is calculated in addition to the CDP's existing debt. The Stability Commission is denominated in Dai but can also be paid using the MKR token. The amount of the MKR token to be paid is calculated based on a feed of the MKR market price. Once paid, the MKR is permanently removed from the system.
CDPs have varying degrees of debt. When you open a CDP you can extract up to 60% of the value in Dai. When ETH falls in price, each CDP becomes more indebted. Riskier CDPs have higher debt ratios. As ETH falls in value, each CDP approaches the debt limit. If a CDP exceeds this threshold, the Maker system will automatically purchase the CDP warranty and subsequently sell it. The owner of the CDP will receive the value of the residual collateral less the debt, the Stability Fee and the liquidation penalty.
Oracles and Glabal Settlers have special permissions in the system that keep Dai's price stable. In order to protect the system from a user who gains control of most of the Oracles, all Oracle inputs pass through the Oracle security module. This system imposes a 1 hour delay on the data, leaving enough time for the MKR governance community and Oracles to analyze the data. A global agreement (emergency stop) is a limit solution to impose the target price on Dai owners. Glabal Settlers immediately shuts down the system to protect the Maker platform. Owners of Dai and CDP users receive the net value of the assets to which they are entitled. The process is decentralized and Maker voters regulate access to it in an emergency.
Users can withdraw Dai as a loan using ETH in the Maker platform.
To create DAI users must block their ETH in CDP in the form of Pooled Ether (PETH). In exchange for filing the ETH as collateral, the CDP then generates Dai for users by calculating interest over the aggregate ether over time.
1) ETH is converted to (WETH) so that it can be used like any other ERC-20 token.
2)WETH is transformed into Pooled ETH (PETH) which joins a large Ethereum pool which is the guarantee for all the Dai created.
3)Once you have PETH you can create a collateralised debt position (CDP) that blocks your PETH and allows you to lure Dai against your collateral, which is PETH.
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