What is DAI and how does it work?

Cryptocurrencies have evolved significantly over the years, gaining more presence among the masses. However, a challenge that has remained constant is the volatility of its prices. Cryptocurrency prices can fluctuate dramatically on a given day, and while some may enjoy the possibility of speculation given by massive price fluctuations, this unpredictability has prevented cryptos from obtaining wider adoption as a method of exchanging reliable value.

In response to this problem, ‘stablecoins’ have emerged as a potential solution. A stablecoin is a cryptocurrency whose price is linked to a stable asset, such as the US dollar, to reduce erratic price fluctuations experienced by cryptocurrencies. Stablecoins can be centralized or decentralized. The centralized ones are usually backed by fiat currencies or valuable raw materials (such as gold, oil, etc.) and depend on the governments or other custodians that issue them. Decentralized currencies, on the other hand, are backed by other cryptocurrencies, giving them a more reliable, secure and transparent structure.

What is DAI Coin?

Dai is a stablecoin, launched by MakerDao, which is linked to the US dollar. This means that the value of a Dai will always be approximately $ 1 USD. Dai is based on the Ethereum network and is backed by Ether, which means that it is completely decentralized because its price stability is maintained through a smart contract system and does not depend on any centralized bank, government or other third party.

You may wonder how Dai maintains its price stability when backed by another cryptocurrency, which of course can be very volatile. Dai’s price stability is managed through a loan system in the Ethereum network. To create Dai, someone with a balance in Ether would deposit their cryptos in what is called a “collateralized collateralized debt position,” which is essentially a smart personal vault that contains your Ether. In exchange for depositing the Ether as collateral, Dai is generated in the name of the holder of the Ethereum.

To unlock and recover your ETH, the Dai holder must simply cancel the Dai plus a stability fee. If the value of Dai falls below $ 1, this stability rate is increased to make Dai loans more expensive. If Dai loans are more expensive, fewer loans will be generated and Dai’s supply will be reduced, which will raise the price. Similarly, if the value of Dai exceeds $ 1 USD, the stability rate is reduced to lower Dai loans, which leads to an increase in market supply and lower prices.

How DAI Coin is handled

Instead of being determined and manipulated by a centralized financial institution, company or government, the stability rate is determined by the community of people who own the MKR tokens, which is the token that governs the MakerDAO system. Ultimately, stability is based on supply and demand within the loan system.

We know that the mechanism behind Dai’s creation and price stability is a bit complex, however, we hope that the above explanation gives you a basic understanding of the concept behind Dai. We will be launching more offers with Dai in the coming months. In the meantime, we hope this provides you with some basic knowledge so you can start getting acquainted with Dai.

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