DAI – What It Is And How It Works

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What is DAI?

Fixed currencies generally pegged on US dollars have appeared in response to the volatility of the cryptocurrency market and the friction in the entry and exit of the unexplored banknotes.

DAI Stable Coin is one of the widely used distributed finance, one of the widely used parts, and is an important building block to expand this movement.

However, this special stable coin is different from other stable coins. So what is DAI, how it works and how it is used? To answer it, it is necessary to look at the tokens themselves, the DAO supporting the DAO, the protocol, the storage, the distributed funding, and the wide recruitment.

Overview of DAI

In 2017, the first Makerdao White Paper was announced and the original Dai Stable Coin System was introduced. Makerdao is an open source project and a distributed autonomous organization.

DAI is a distributed mortgage cryptocurrency on the US dollar, and its stability is managed through an Ethereu m-based smart borrowing contract system. Basically, DAI can lock in to get savings. Alternatively, you can lock in the collateral approved to rent a DAI.

In White Paper, all users can create DAIs using this system by using Ethereum (ETH) as collateral through a smart contract manufacturer known as a CDP (Collateralised Debt Position), which is a collateral storage. It is explained. Initially, ETH was the only asset accepted as a collateral of the system, so the DAI created from ETH was a single collateral DAI or SAI.

The Dai StableCoin system is one of the largest distributed applications (DApps), which is known as a Protocol Maker based on Ethereum blockchain, and has caused great spread (Defi). It is. Currently, the Ethereu m-based assets approved by the manufacturer governor (MKR) are accepted, and a mult i-collateral DAI (MCD) system is built. The MKR holder will vote for the risk parameters of these assets as an important factor in the dispersed governance process of the manufacturer.

The DAI stablecoin

Blockchain technology and distributed finance gives the opportunity to break away from the conventional centralized financial system that often falls into dysfunction. The need and usefulness of stable coins has been established for a long time.

However, unlike DAI, the options backed by no n-converted banknotes such as Tether (USDT), USD Coin (USDC), and Paxos Standard (Pax) have the advantage of interaction with encryption ecosystem, but are still still. It requires 1: 1 USD support and the need for central authorities. Therefore, DAI brings reliability and transparent stability to the encryption ecosystem.

DAI is the first one for providing a stable cryptocurrency that respects this distributed vision. With the 1: 1 USD model and the centralized centralized and regulation complexity, DAI is still compatible with dollars, more compatible with a wider ecosystem, and essentially distributed. Provides a new means to create and use a stable currency.

How is DAI created?

The DAI is an ERC20 token created by depositing the approved collateral in a smart contract called Maker Vaults in the Maker protocol. This process will introduce DAI as a loan and provide fluidity that can be built and used, like other cryptocurrencies in the ecosystem.

As an option, you can automatically get savings on what is called Protocol Maker's DAI savings (DSR) contract. DSR functions as one of the mechanisms of price stable, and if the DAI price exceeds or lower than the target of the target amount, the MKR holder can vote to correct the savings rate.

Each DAI distributed is backed by excess collateral instead of a monopoly bill. In other words, the value of the locke d-in assets remains higher than the value of the DAI debt, which helps the system to consider volatility.

With the design, the provision of DAI will not be changed by the participants. Instead, it is maintained through a smart contract system that dynamically responds to changes in the market price of collateral assets.

MakerDAO

Makerdao was established in 2014 as an open source project based on Ethereum by CEO RUNE CHRISTENSEN. The Maker DAO project has introduced Dai StableCoin System, a Maker Protocol, and is managed by a distributed group of global participants who own the Governance token, MKR.

Maker Protocol is one of the most adopted DApps in the Ethereum blockchain, managed by a distributed developer group and is becoming an important gear of the growing Defi ecosystem.

This protocol uses the approved assets as collateral through the unique smart contract known as the CDP (Collateralised Debt Position).

In addition to the smart contract infrastructure, the Maker protocol also includes important teams to maintain the operation of keepers, Oracle, global setlers, and Makerdao.

Maker Protocol community

The gatekeeper will use the protocol's ruling opportunity to provide fluidity to the entire system and help maintain a $ 1 target price. Sell ​​at a higher target price and buy it at a low price, and participate in the auction when the manufacturer Ballot is liquidated.

Oracle is a decentralized external person selected by MKR voters and provides reliable rea l-time data on the securities prices of the manufacturer storage.

Global Setler is selected by MKR voters and functions to reduce the risk of large drawers in a short period of time as the last defense line against the attack on governance processes and Oracle feeds.

Maker community individuals and organizations form a DAO team that runs specific services for Makerdao.

Through proposal voting and voting systems, the holder manages DAI protocols and financial risks to ensure stability, transparency and efficiency. Each MKR token locked by the voting contract is equivalent to one governance voting.

Maker Vaults

The manufacturer Ballot is a smart contract and can lock security assets to create a DAI. Each protection asset requires an individual storage. Users can access the Maker protocol through various user interfaces and create and protect these storage. For example, myetherwallet.

If you create a DAI in this way, you will be obliged to repay, along with a stable fee to bring out the collateral locked in the safe. The stable fee must be paid every time a national treasury owner pays a part or a full amount of debt to bring out the collateral. This is a return of the annual ratio added to the existing national treasury debt and is paid to DAI.

DAI stability

If the DAI value falls below the US dollar, the stable fee increases, the loan becomes more expensive, the loan production decreases, so the supply of DAI decreases, and the price increases. When DAI exceeds $ 1, the stable fee decreases, loans become cheaper, loans increase, DAI supply increases, and prices decrease.

The DAI is almost stable throughout its duration, but has returned to the average value in some periods that the system cannot maintain PEG.

In 2019, the bidding in the neighborhood temporarily reduced the US dollar to the US dollar. The MKR holder raised the borrowed interest rates until PEG stabilized, and voted for a series of stable fees.

During the peak of Defu Bull in 2020, the opposite took place, and DAI maintained a price of more than one US dollar over several weeks. The stable fee fell and promoted the increase in DAI supply, but the demand was still very strong. As a result, the stable fee was raised by the manufacturer's governance system, speculation was accepted, and profits increased. With this governance change, it has been able to benefit the system and improve the lon g-term reserves for a short period of time than a short term.

As a result, there will be an extreme period of time when the flexibility of temporarily exceeding or lower than the pegs will be required, which will have more opportunities for the system in the system.

Automated auctions

Since the user interacts directly with the protocol, the dome is essentially no n-housing, and each user can completely control security unless it falls below the specified clearing level. If the storage is too dangerous to reach a parameter defined by the manufacturer's governance process for its assets, the storage is cleared.

The liquidation is compared by comparing the liquidation ratio with the current debt collateral ratio, and then processed by a protocol auction that has been compared to unpaid national treasury debt and protects a wider range of systems.

The buffer maker includes DAI revenue from these auctions, including liquidation fees, and stable fees imposed when collateral is collected. When this reaches the threshold determined by the governance process, the surplus DAI is sold at the surplus auction and is used to purchase an anonymous MKR from the total supply. The success of DAI promotes the excellent governance of the constructor protocol, and is essentially linked to the owner's MKR performance.

If the secured auction cannot procure sufficient DAI to cover the duty of the storage, it will be a protocol debt and will be covered by the buffer maker DAI. If there is not enough DAI in the buffer, the protocol is activated the debt auction, the MKR is cut and sold to the DAI bidder. If the system does not provide sufficient buffers, MKR holders will be penalized by increasing the amount of bids, so good governance is also encouraged.

DAI – becoming the most popular asset in defi

The manufacturer's distributed Dai StableCoin protocol has rapidly used the most used digital assets in the rapidly growing Defi space. Participants can use DAI to pay DAI to accept DAI instead of ETH, so developers have a smooth o n-site and overall experience. Can be provided. Thanks to the blockchain configuration of Ethereum, they also wrap DAI to various smart contracts that have been changed for various applications, such as distributed exchanges, asset management services, loan platforms, payment solutions, and encryption keys. You can.

DAI's strength has given high reliability to StableCoin and Maker protocol for the Defi community, contributing to the further development of Maker Ecosystem and the impact on the network. The fact that DAI's usefulness, an increase in recruitment rates, and the fact that Ethereum and Maker protocol make the developers build new financial services on top of the DEFI have infinite opportunities.

To date, more than 400 projects have been pursuing the results of manufacturers and networks, utilizing the community and fluid teams developed by manufacturers and networks.

Fluid is indispensable to succeed in the Defi project, and without it, it cannot promote the spread, and the project is likely to fail. For Defi, a distributed brand fluid team of smart contracts shared between platforms is essential. This liquidity share increases the amount of transaction, attracts more users, and extends the project to add more services.

DEFI's core tenet, "tolerance," can only be guaranteed if platforms have access to a fair and stable unit of account like DAI. Because of this, the use of DAI in DEFI applications has seen tremendous growth and looks set to continue as further network effects and shared liquidity.

Increasing adoption

Because DAI is fixed yet decentralized, it is increasingly being adopted for working capital, hedging, secured lending, savings, cross-border trading, e-commerce, digital art, gaming, prediction markets, and more.

Interestingly, it has been particularly popular in the Latin American market. Facing struggling economies, hyperinflation, and capital controls, Latin Americans are turning to cryptocurrencies as an alternative to the failure of their domestic fiat currencies.

Although cryptocurrencies are attractive, their high volatility can be jarring when compared to the safe haven of the US dollar. People need a stable currency to protect their savings, and DAI, which is not subject to capital controls (unlike the US dollar), has emerged as an attractive store of value currency. Argentina, in particular, has seen trading volumes quadruple to over 20 million USD in 2020 alone, with peer-to-peer exchanges and platforms also growing sixfold. This infrastructure and growth in trading volumes has allowed people to store their savings in DAI and convert them back to their home currency when needed, preserving as much value as possible, especially when combined with the DAI Savings Rate feature.

In the face of widespread currency depreciation, Latin America has embraced DAI, with mainstream adoption driven by real need, and DAI providing an easy way to store value in PEG USD.

Summary

The Maker protocol allows users to generate DAI, a stable store of value that exists entirely on the Ethereum blockchain. DAI is a stable coin that is not issued or controlled by a central actor, trusted intermediary, or counterparty. DAI brings stability to volatile crypto markets, providing the liquidity DAI needs, decentralized benefits and features that other stablecoins cannot offer for DEFI platforms and users. As a result, we are seeing a huge growth in adoption from both the decentralized and traditional finance worlds.

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