Ciphered currency supported by Ethereum: Dai is trying to change the rules of the stable currency game
Abstract: Dai is actually a kind of asset-backed stable currency on the chain, and is also gaining some momentum in the real society.
In the traditional market, some bonds are backed by the US dollar, and some other assets are supported by gold. But “stable assets” Dai has nothing to do with any major asset – it is supported by another cryptocurrency.
A stable currency such as Facebook's Libra is a new type of cryptocurrency whose main purpose is to avoid the "weakness" of cryptocurrencies such as Bitcoin that are difficult to trade due to price fluctuations. Their value is based on more stable underlying assets, usually traditional currencies or commodities.
However, unlike other currencies, Dai uses an unstable digital currency, Ethereum, to maintain a stable value.
This may sound counterintuitive, but its advocates say that it works — "smart contracts," block-based contracts, where the terms are set in code— meaning that Dai will remain stable The value while maintaining transparency.
Stabilizing coins like Libra and Tether have become the focus of global regulators, in part because of the companies behind them managing how they manage their reserves.
Briefing on Dai
Dai was founded in 2017, Ethereum ERC-20 Token, locked in the blockchain contract of the algorithm to avoid currency control concerns. Proponents say this provides the benefits of stabilizing coins – real-time trading and stable value – while avoiding governance risks.
In the field of DeFi, MakerDAO is an influential project. It generates Dai by decentralization, which is now the most widely used decentralized stable currency in DeFi.
For example, if you need a loan, and you have Ethereum, you believe that Ethereum will appreciate, then you can use Taifang as collateral to generate Dai, and Dai to buy more Ethereum on the trading platform. To generate more mortgage debt positions, leveraged transactions can be carried out on the blockchain without any third party or centralization agency.
It is gaining momentum in some real society. For example, the Oxfam aid agency is testing it to see if it can distribute aid on a Pacific island, and for example, some Argentine depositors eager to avoid inflation are using it.
How regulators treat Dai may help shape cryptocurrencies from speculative use to de facto currencies on the Internet. But their prospects remain unclear.
How does Dai work?
Like Bitcoin, Dai wants to power the digital economy, and people can bypass banks and other financial companies and trade directly. Its operation is actually complicated.
Dai is actually linked to the US dollar and backed by Ethereum, which is locked in publicly visible contracts stored on the blockchain.
Many stable assets are trusted because their value is supported by the central bank's currency. Users trust Dai because the Ethereum locked in the contract always exceeds the value of Dai in circulation.
When Dai's value deviates too far from the dollar, the balance mechanism will lead it to pick up. (When Dai's price exceeds $1, the mechanism it designs will take steps to lower its price; when Dai is below $1, the mechanism will increase its price.)
Rune Christensen, founder of Dai's protocol MakerDAO, said. “Through the decentralized stable currency, you can see everything in the blockchain. Anyone can do real-time review.”
Who is controlling Dai?
Dai is not completely decentralized yet.
The Maker Foundation, registered in the Cayman Islands, monitors Dai. The foundation, also led by Christensen, is dedicated to developing code and other projects, hoping to make Dai and MakerDAO completely user-controlled.
Mariano Conti, head of smart contracts, said he hopes the foundation will disappear within two to three years. "The goal is to boot the system until it is no longer needed."
But there are risks in the governance model.
For example, Timothy Stranex, co-founder of the London-based cryptocle exchange Luno, said that flaws in smart contracts could make it easy to exploit and lead to the theft of assets stored in the blockchain.
But MakerDAO responded that the "emergency shutdown" mechanism can prevent it from being attacked. It stated that if the user tried to take over the agreement, the agreement would be triggered to protect the collateral and return the funds.
Since the release in October 2017, the supply of DAI has continued to grow. According to Scallions, by 12 o'clock on the evening of November 18, the Dai debt ceiling will be activated to 153 million Dai (100 million reserved for Sai upgrade). 50 million is the upper limit of ETH's debt in multi-collateralized Dai, and 3 million is the upper limit of BAT's debt).
According to the analysis, the current largest holder of DAI is the Compound contract, which accounts for 17.11% of the total supply. The second largest holder is the dYdX contract, which accounts for 3.74% of the total supply. Maker's own Eth2Dai contract ranks tenth on the list.
What do regulators think of Dai?
do not know yet.
According to a report by Scallions, a report from the Group of Seven (G7) warned that a cryptocurrency such as Libra would pose a risk to the global financial system. Even if Libra's supporters solve the problem, the project may not be approved by the regulator. The report further stated that the G7 believes that any Stabilizingcoin project should not be operational until the legal, regulatory and supervisory challenges and risks are not adequately addressed.
US regulators declined to comment on Dai.
According to the Financial Conduct Authority, it does not use the term “stabilized currency” because stability is purely an “ideal state” and requires thorough case analysis.
Experts say that stable currencies like Dai have become a new challenge for regulators, and they are working hard to tame the fast-changing cryptocurrency industry.
Phil Angeloff, a lawyer at Clifford Chance in Washington, said: "Regulators are trying to combine existing frameworks with these new technologies."
What is Dai's performance in the real world?
It is better than many cryptocurrencies that are mainly used for speculation.
As we mentioned earlier, Oxfam tested Dai’s assistance in Vanuatu, a Pacific island country, this year. Natural disasters often occur in Vanuatu. It provided Dai for approximately 200 people and 30 suppliers on more than 80 islands in Vanuatu, establishing a small Dai-based economy.
Oxfam's Sandra Hart said in Port Vila, the capital of Vanuatu: "It allows us to control more, and after the disaster, we can interact more directly and more economically."
Hart said that another large-scale experiment will be conducted in Vanuatu next year, and the trial will be carried out on several islands.
In Argentina, where inflation is severe, Dai has also caught people's attention.
Maker Foundation's Conti said that although data is scarce, in recent weeks, the telegraph group for Dai users has doubled in size, reaching more than 450.
Reuters interviewed five users in various cities in Argentina and said that Dai provided a protection to protect their savings from the impact of peso depreciation.
Romina Sejas, a law student in the western city of Mendoza, said, “My mother and I started to pay a portion of the money in Dai. We can't store it in the form of pesos. Every month there is inflation. We have to be creative. ”
Jose Villar, software project manager at Buenos Aires, said that Dai's decentralized operation makes it an attractive alternative to other stable currencies. "Others (stable coins), there may be a bank behind, but we don't know who is the real behind-the-scenes."