The DAI stablecoin is a decentralized digital currency that aims to maintain its value in line with the US dollar, providing users with a stable asset to transact with in the volatile cryptocurrency landscape. Unlike traditional stablecoins that are backed by fiat reserves, DAI operates through a system of smart contracts on the Ethereum blockchain.This innovative mechanism allows users to create DAI by locking collateral—typically in the form of Ethereum—into a digital ‘Collateralized Debt Position’ (CDP). Upon doing so, users can borrow DAI against their collateral, ensuring that they retain full control and ownership of their assets while benefiting from the stability that DAI offers.
To maintain its peg to the US dollar, DAI utilizes an algorithmic adjustment system that monitors the price of collateral and the DAI supply. If DAI’s value drops below $1, incentives are created to reduce supply or increase demand, such as offering discounted rates for acquiring DAI. key components of DAI’s ecosystem include:
- Stability Fee: A fee charged on users who want to close their CDPs.
- Liquidation Mechanism: Protects the system by liquidating collateral if it becomes under-collateralized.
- Maker Governance: Users who hold the MKR token have the power to influence decisions related to DAI’s stability and protocol updates.
