The DAI Stablecoin is a currency on the Ethereum blockchain whose value is pegged to the US Dollar. This stable value, unheard of in the cryptocurrency world, is maintained by a clever mix of interest rates and economic incentives.
DAI was built by MakerDAO, but is actually issued by users directly. This ensures the market decides how much money to print, or burn, and reduces reliance on any single actor to decide the money supply.
Let me walk you through how new DAI is minted:
- Users deposit Ether ($ETH) to the MakerDAO smart contracts
- Users open a CDP, or Collateralized Debt Position, pledging their Ether as collateral for a loan
- For each 1.5USD worth of Ether deposited, users can mint up to 1DAI
- Users are in charge of maintaining their collateral ratio at 1.5x with their loans
- If the collateralization ratio isn't enough, the Ether backing a CDP is liquidated.
- CDPs have a variable interest rate. If DAI is below 1USD, the rate is increased, incentivizing debtors to reduce their DAI positions