When bitcoin came into existence in 2009, all people knew was; This is something with high volatility;
And yes, it was and till now it is. There is no stability in the price of bitcoin. It fluctuates like a sea-saw (up and down). Many altcoins were created after bitcoin and they all follow the volatility trend. The financial institution (Banks and some governmental parastatals) began to use the high volatility rate of cryptocurrencies to attack and label them as scams, which trend all over the world. Many people could not adopt the use of cryptocurrency for business purposes because reliability is not guaranteed. For instance, a person who wants to transact business in a day or two would not want to convert his fiat to bitcoin, because of the volatility rate. His fund might reduce before he's ready to use it. Most times, they don't think about the possibility of it increasing. All they want is to just save their fund and transact because of the advantages that come with sending with low fees, speed, and transparency. However, the volatility part was a barrier. This was what brought about the stable coins
Stable coin appears as the name implies. They are cryptocurrencies that possesses stability as their primary feature. Every other feature a stable coin possess is secondary, because they are designed to be pegged to the value of another asset and this value is maintained overtime. Stable coin can be pegged to assets like commodities, price index, real assets and cryptos. Talking about fiat, stable coin are mostly pegged to dollars, and British pound. For example, if a stable coin is pegged to US Dollar, it means one unit of the stable coin is equivalent to one unit of the US Dollar
Currently, several stable digital currencies exist. We have Tether, which is classified as the most used stable coin. We also have PAX, TUSD, SBD, DAI and more, but before explaining DAI, let's see where most stable coin falls.
-Centralized stable coin are backed by fiat currencies or some central entities like exchanges, organizations and so on. There are some famous centralized stable coins that can never be sidelined. They are Tether, and USDT. They operate in a centralized way and they are cool. However, DAI stands out because it has it's own way of obtaining stability, through the decentralized system
The Ethereum blockchain houses several projects and the tokens are called ERC 20 Tokens. DAI was launched on the ethereum blockchain by Rune Christensen and it is the product of MakerDAO. DAI cannot operates on it's own without MakerDAO. They complement each other because of the stability of DAI that should not be jeopardized. DAI is pegged at $1 to the USD, which is why it is called a stable coin
What maintains the peg of DAI is the MAker DAO, because DAI is not backed by fiat. This is why DAI is different from other stable coins. DAI is the first stable coin that exists on the blockchain as a decentralized platform. It's backed by a collateralized crypto that is maintained by a collateralized ledger through the use of a mart contract (SMT). This crypto is called MAKER DAO
MAKER is an autonomous organization built on the ethereum blockchain and they designed Maker DAO and after some time came up with SAI which later was changed to DAI. The S means single and that was when only ethereum was the basic altcoin for collateralization. The D denotes double, when both Ethereum and BAT became the only two altcoins used as collateral on the maker network. The Maker Dao holders are in charge of the risk management of DAI because they determine DAI insurance, risk parameters, target rates and so on/div>
How does Dai maintain its peg to an asset
See the price of DAI for days. It is always like that most times. Pegged at $1. It is very balance
The way DAI maintain its stability is the same thing as a stable balance of economics incentive and gain theory. When ever there is a deviation in the 1:1 peg, it's an opportunity for people to gain some bucks from some quick transactions. For instance, someone can lock his ETH in the MAKER vault to unlock DAI, and when DAI surpasses $1 on any exchange, he can unlock the DAI paying little fees and sell it to make profit. If for instance DAI hits $1.11, you can lock your asset to generate DAI at $1, and then unlock and make $0.11 as profit on each coin you purchase instantly. This incentive mechanism stabilizes the price of DAI and keeps it at its pegged rate. This mechanism also shows that the supply of DAI is automatically adjusted to reflect price differences, which causes the increase in supply, and in economics, the increase in supply brings about a fall in price
But DAI has a way of balancing up which is spectacular. This same mechanism works the other way round to favor users. When the price of DAI falls below $1, users can buy at that low price to unlock the asset they locked at $1. For instance, if the price of DAI reduces to $0.98999, you can buy, send to the vault and unlock the asset you locked using $1. In this wise, you are not unlocking with the same price you used to lock your asset in the first place. This means, you have some gain unlocking your asset at a lower rate compared to what you used to lock it. And when this happens, you are pulling your fund from creating more DAI and there would be a reduction in supply. Looking at demand and supply in economics, the more the supply of DAI reduces, the higher the price goes, so this brings the price to equilibrium
###More questions comes.
What if the price of DAI or any asset used as collateral falls drastically, how will the DAI stable coin be regulated
The maker team prepared an excellent safety mechanism for a reasonable stability which is called overcollaterilization. Here, more crypto must be locked before DAI can be unlocked . In this case, when the price of locked crypto drops by stipulated percentage, there would be a liquidation on the users account. For instance, if the collateralization rate is set at 200%, it means $200 of asset (ETH or BAT) is needed to unlock 150 DAI. As the price of the asset increases against the DIA, so also the number of DAI generated increases and vice versa. Also, if the price decreases, the generated DAI decreases, but if it approaches the liquidation level, an automatic liquidation is triggered, and the system (maker platform) sells off the collateral to cover the debt , and leaves the rest for the user. This relates to marging trading on some platforms. The fund generated from the liquidation of users account is used as surplus to maintain and keep the maker system solvent
But there is always another plan in case of necessity.
What if every user meets up and their
assets are not liquidated? How will the system remain solvent to keep the value of DAI pegged?
IN this case, a debt auction is initiated where the bider that wins pays a certain amount of MKR to cover the outstanding debt that the collateral auction is unable to cover. MKR is minted by the system which increase the supply of maker token and since the MKR dilution needs to be contracted by the decrease of the MAKERS token, the debt auction works well to cover up
The dynamics of the auction has helped DAI remain stable. MKR was at a point $1,500 and it depreciated drastically. But the price of DAI remain stable. This means the concept put in place to stabilize DAI works and it has been so till today. Check the p[rice of DAI on coinmarket cap. It remain pegged to a dollar
DAI is one of the best stable coin in existence. It creates a way to trade, borrow, and save. On Oasis trade, you can locate these features. You can trade your DAI for other ERC20 tokens, ETH, and more. You can also unlock DAI by creating a vault. You can also borrow DAI by locking up your ETH or BAT.
DAI is a unique stable coin. Get to know about it and see the huge advantages it offers.
Thanks for reading.
Thanks prof @yohan2on for the wonderful topic. More power to your elbow.