I’d like to post a series of articles under the name of “Crypto Classic”. It’s more like educating myself. But it could be helpful for some community members too.
DAI is a decentralized stablecoin cryptocurrency that operates on the Ethereum blockchain. It was created by the MakerDAO project, which is a decentralized autonomous organization that governs the creation and management of DAI. DAI aims to maintain a stable value against the US dollar, with its value pegged to $1 USD.
Unlike traditional stablecoins that are backed by fiat currency reserves, DAI achieves its stability through an algorithmic mechanism. The primary mechanism used is called “collateralized debt position” (CDP). Users can deposit Ethereum (ETH) or other supported tokens as collateral into a smart contract called a CDP. In return, they can generate DAI tokens, which they can then use for various purposes, such as trading, lending, or as a stable store of value.
The MakerDAO system dynamically adjusts the supply of DAI based on supply and demand dynamics. When the price of DAI exceeds $1, the system incentivizes users to create new DAI by increasing the interest rates for borrowing DAI. Conversely, when the price of DAI falls below $1, the system encourages users to repay their DAI and remove it from circulation by reducing the interest rates.
The decentralized nature of DAI and its underlying system allows for censorship-resistant transactions and reduces reliance on centralized authorities. However, it’s important to note that DAI is still subject to the volatility of the collateral assets, especially if they are highly volatile like cryptocurrencies.