Dai is a stable cryptocurrency (stablecoin) backed by the value of USD, each token worth $1. Only with stable digital currencies will it be possible to achieve the real potential of blockchain technologies.

Maker is a smart contract platform on top of the Ethereum ecosystem, which supports and stabilizes the value of Dai through a dynamic system of collateralized debt positions (Collaterized Debt Positions) or CDPs, by autonomous feedback mechanisms and by external actors incentivized appropriately.

Maker allows anyone to leverage their Ethereum assets to generate Dai on the Maker platform. Once the Dai are generated, they can be used in the same way as any other cryptocurrency: they can be freely sent to others, they can be used as payment methods for goods and services, or they can be endured in the long term as savings. Importantly, the Dai generation also creates the necessary components for robust decentralized exchange platforms that allow margin trading.

What makes DAI special?

The system that allows to maintain the value of DAI anchored to the US dollar is based on the smart contracts that issue said currency, in exchange for a collateral in the cryptocurrency ether (something like a pawn).

The DAI algorithm is constantly monitoring that these contracts do not fall below a value of 150% of the DAIs issued. That is, there must be at least $150 dollars in ether supporting $100 in DAI. In addition, all the information about the contracts is public as it is based on the Ethereum network, a base different from that of Tether, whose support in fiat money has raised doubts about its real value.

The token is based on the most used blockchain for decentralized applications (DApps) and smart contracts (Ethereum), whose decentralized power has been the infallible engine of the most important projects in the world of cryptocurrencies.

DAI Stability

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.

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.

Smart Contracts with Guaranteed Debt Positions

Any user that has assets with guarantees can use these to generate Dai on the Maker platform through special contracts in Maker called Guaranteed Debt Positions or Collaterized Debt Positions (CDP).

CDPs have collateral assets deposited by a user and allow this user to generate Dai, but also to generate debt aggravates. This debt effectively encloses the assets with collateral within the CDP until it is covered after paying the equivalent amount of Dai, at which point the owner can once again take out his collateral assets. Active CDPs always have excess guarantees, that is, the value of the guarantee is always greater than the value of the debt.

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