Getting Started | What is DAI Stabilizer and why it stays stable

The stable currency Dai of Decentralized Autonomous Organization MakerDAO on Ethereum is one of the most popular DeFi. Currently, about 2% of Ethereum is worth about $300 million in smart contracts for Maker's mortgage debt position .

So, what magic does it have to achieve such an achievement?

In December 2017, MakerDAO released a decentralized stable currency called Dai. Dai Ethereum ERC-20 Token, and 1:1 anchor with the US dollar. In other words, each Dai is worth $1, no matter how many Dais on the market.

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Dai can trade freely like other ERC-20 Tokens, and anyone with an Ethereum wallet can own, accept and exchange it without any middleman. No one or company can control it, which gives it features that were previously impossible.

Dai can transfer money immediately and can trade across borders at no cost (except for Ethereum's handling fees). Merchants accept Dai to enjoy the huge benefits of blockchain technology without worrying about the huge volatility of encryption assets. Similarly, consumers don't have to worry about spending a crypto asset that is continuing to appreciate.

Some people may ask, isn't USDT also a dollar-denominated Token? Why do you need Dai?

The problem is that USDT and other centralized stabilization coins may be hacked, may be shut down, and your funds may be stolen. Instead, as a truly decentralized stable currency, you only need to trust the blockchain.

So how does Dai work?

Dai does not have a centralization organization like Tether to support its currency, nor does it use real dollars to support every bank with a Dai value of $1. It is entirely based on the Ethereum network using smart contracts to achieve its existence.

Dai can be seen as a masterpiece of game theory, with a careful trade-off of economic incentives to achieve one goal: Dai's price continues to approach $1.

When the price of Dai exceeds $1, the mechanism it designs will take steps to reduce the price of Dai; when the price of Dai is less than $1, the mechanism will increase its price. Rational users who participate in this mechanism do this because when Dai's price is not $1, they can make money. The farther they deviate from $1, the one they get will be revised to $1. The stronger the economic incentives.

For example, if you need a loan and you have ETH, you believe that ETH will appreciate, then you can use ETH as collateral to generate Dai, Dai to buy more ETH on the trading platform, and ETH to generate more. CDP (mortgage debt position, which is Dai's mortgage), leveraged transactions can be carried out on the blockchain without any third party or centralization agency.

The increased demand for Dai will increase its price to more than $1. When this happens, you can generate Dai and immediately sell it to Dai for more than $1, so you can make money.

When Dai's price is less than $1, those CDP owners can repay their debt at a lower price. For example, Zhang San opened a CDP with ETH worth $1,000, and then took out 500 Dai. When this CDP is turned off, 500 Dais need to be repaid. If the price of Dai falls to $0.99, then you can buy 500 Dais for a loan of $495 to earn a $5 ETH.

This balance between supply and demand ensures that Dai can always anchor $1.

Dai's success is reflected in the price of $1 for each Dai. Because it can maintain an anchor value of $1, people's trust in it will increase and form a positive cycle.

What do you think are the advantages and disadvantages of this decentralized stable currency compared to the centralized stable currency such as USDT? Feel free to share your opinion in the message area.

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Author | Wayne

Produced|Baihua blockchain (ID: hellobtc)

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