DAI is a decentralized, stablecoin cryptocurrency that is built on the Ethereum blockchain
- jimmyboss
- Jan 18, 2023
- 2 min read
DAI is a decentralized, stablecoin cryptocurrency that is built on the Ethereum blockchain. It was created by MakerDAO, an open-source project that aims to provide a stable and decentralized alternative to traditional fiat currencies.
One of the main features of DAI is its stability. The value of DAI is pegged to the US dollar, meaning that 1 DAI is always worth $1. This stability is achieved through a system of collateralized debt positions (CDPs) and a decentralized autonomous organization (DAO) that manages the supply of DAI.
In order to create DAI, users must first open a CDP by collateralizing their Ethereum (ETH) in the MakerDAO smart contract. The collateralized ETH is then used to mint DAI, which can then be used for various purposes such as making payments, trading, or as a store of value. The user can then pay back the debt and retrieve their collateralized ETH.
The system also uses a feedback mechanism called the Target Rate Feedback Mechanism (TRFM) to adjust the supply of DAI and maintain its peg to the US dollar. The TRFM uses oracles to gather information on the exchange rate between DAI and the US dollar and adjusts the stability fee accordingly. If the exchange rate deviates too far from $1, the TRFM can increase or decrease the stability fee to incentivize or disincentivize users to open or close CDPs, in order to stabilize the DAI price.
The MakerDAO system is governed by the MakerDAO token holders, who can vote on changes to the system, such as changes to the stability fee or the collateral types that are accepted. This decentralization ensures that the system remains fair and transparent for all users.
DAI has several advantages over traditional fiat currencies and other stablecoins. Since it is built on the Ethereum blockchain, it is decentralized, transparent and censorship-resistant. It is also easily transferable and can be integrated into decentralized applications (dApps) on the Ethereum network.
In conclusion, DAI is a decentralized stablecoin that is built on the Ethereum blockchain. It is designed to provide a stable and decentralized alternative to traditional fiat currencies. Its stability is achieved through a system of collateralized debt positions (CDPs) and a decentralized autonomous organization (DAO) that manages the supply of DAI. It also uses a feedback mechanism called the Target Rate Feedback Mechanism (TRFM) to adjust the supply of DAI and maintain its peg to the US dollar. DAI is transparent, censorship-resistant and easy to transfer, making it an attractive alternative to traditional fiat currencies.
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