Independent Stable Coin- DAI
Stable coins are just the name implies: they are cryptocurrencies with stability as their primary feature. They are pegged to the value of another asset and hold the same value with that asset through time. Stable coins can be pegged to any assets, commodities, a price index, a real asset, and even other cryptos. However, they are mostly pegged to fiat currencies like the USD or GBP etc. When a stable coin is pegged to the USD, one unit of that crypto should always be equal to one USD.
The dynamic of stable coins ensures that any deviation opens up arbitrage opportunities. The stable coin will also collapse if ever the USD collapse. By the time this article was written, there was a case of Terra UST stable coin collapse against USD which is under investigation by the authorities.
There are two types of stable coins: centralized version and decentralized version. Centralized versions are stable coins that are usually backed by fiat currency that is held by some central entity like a trust or some other form of organization.
DAI is able to maintain the peg without any fiat currency backing it. DAI is backed by collateralized crypto debt that is maintained on a decentralized ledger through the use of smart contracts.
DAI was launched in 2017 and was developed by MAKER a decentralized autonomous organization that was built on the Ethereum Blockchain. MAKER is trying to develop a line of decentralized stable coins that will be tied to other assets. MAKER has issued two tokens named MAKER (MKR) and DAI Stable coin (DAI). Both of them are ERC 20 standards which means that you can easily store and transfer them like any other Ethereum-based token.
The name Dai is derived from the Chinese character 貸, meaning to lend or provide capital for a loan.
Dai is created by users borrowing against locked collateral and destroyed when loans are repaid.
Anyone can create a new DAI by depositing ether as collateral and drawing an appropriate amount of DAI
Locked collateral can be recovered at any time by paying back the borrowed DAI (plus a stability fee).
Thus, all DAI in circulation is at all times backed by at least as much collateral. In fact, the system only allows borrowing up to what Maker governance considers to be a safe ratio (currently 150%) so USD $100M of dai in circulation would for example be backed by at least USD $150M of ETH locked in the Maker collateral vault.
The USD value of locked collateral will of course change over time. When the value of collateral increases, borrowers are able to create new DAI (up to the safe ratio). When the USD value of the collateral falls, borrowers can choose to either repay borrowed DAI or deposit more collateral, as their position approaches the liquidation ratio. Borrowers who allow their positions to fall below the safe ratio risk forced liquidation.
Forced liquidation is MAKER way of ensuring that the amount of collateral backing circulating DAI remains within safe parameters. Positions that fall below the liquidation ratio can have their backing collateral seized and sold on the Maker debt market for dai, which is then removed from circulation. In cases of extreme volatility where the value of seized collateral may be insufficient to cover the outstanding debt, the supply of collateral wrapper tokens is expanded to cover any shortfall.
Note: Collateral holders can see their claim on the pool fall in value in situations where the system must cover any forced liquidations with a negative debt ratio. Collateral holders in DAI 1.0, therefore, carry the responsibility of backing the system through periods of volatility as well as having the opportunity to profit when the system is healthy.
MAKER holders are essential in charge of the risk management of the DAI ecosystem. They can make important decisions that relate to DAI issuance risk parameters, target rates, global settlement decisions, and much more. Prior to the launch of the multi-collateral DAI, the MKR tokens were used in order to pay the stability fee for those who take out loans in DAI.
DAI is a coin that is always worth $1 that you completely control, with nobody to back it and no need to audit any reserves. DAI is able to maintain the peg through a careful balance of economic incentives and game theory. The system creates an arbitrage opportunity every time there is a deviation from the one-to-one peg. Users can borrow DAI by placing their cryptocurrency into what the MAKER team calls a vault. In the days of single collateral, this was termed a Collateralized Debt Position (CDP). Currently, the collateral can be Ethereum (ETH) or Braves (BAT). So the users lock their ETH or BAT into the vault in order to unlock the DAI. To repay they can just send the DAI back along with a fee in order to unlock the collateral they posted.
This is all managed in the vault through the use of a decentralized smart contract. Basically, as an Ethereum holder, you can generate DAI for only one dollar. If DAI is being sold in an exchange for more than one dollar you can quickly unlock the DAI and sell it for a quick profit.
The most direct way to get DAI is by taking out a loan on MakerDAO’s Oasis platform. You can also trade DAI on that same platform or use a centralized exchange such as:
1. Binance Exchange - you can purchase DAI using your mobile phone or desktop. You only need to follow the step as instructed. You can also receive a 25% discount on trading fees using Binance Coin (BNB). Use the link above for a bonus 10% discount
2. CoinBase - this is one of the most popular platforms because it is easy to use on your phone or tablet and is available in most countries. On CoinBase you will also find many of the top 100 coins. CoinBase will send email confirmations for another layer of security if you are using a PC. CoinBase also can be login using your phone. When you join CoinBase you can get AUD 13.84 in free Bitcoin when you buy or sell AUD 138.41 or more, by using the above link.
3. FTX - Trade DAI and other cryptos with zero fees on FTX. Use referral code “24Boston” or use the link above and get a free coin when you trade $10 worth of coins
4. Kraken Trade NMR and other cryptos and get 10% discount on trading fees.
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