Web3 Glossary D ~ DAI
DAI goes beyond a simple dollar-pegged stablecoin. It’s a pioneering experiment in decentralized finance, architected by the MakerDAO and the Maker Protocol on Ethereum.
DAI Mechanics:
- Decentralized Issuance: Unlike centralized stablecoins backed by fiat reserves, DAI is minted through a permissionless Maker Vault system. Users lock up crypto assets (ETH, WBTC, etc.) as collateral exceeding a set collateralization ratio (currently ranging from 101% to 175%).
- Dynamic Stability Peg: DAI’s peg to the US dollar isn’t a hard fix. A complex system of oracles and smart contracts manages a soft peg. Price deviations trigger automated actions to incentivize arbitrage opportunities, pushing the price back towards $1.
- Stability Fees and Dai Savings Rate (DSR): To maintain stability, users pay a stability fee on their CDP debt. Conversely, a DSR incentivizes users to hold DAI in their Vaults, creating a sink and source mechanism to regulate supply.
Technical Nuances:
- Multi-Collateral DAI (MCD): This innovation allows various crypto assets as collateral, increasing capital efficiency and mitigating reliance on a single asset like ETH.
- Medianizer Oracle: This decentralized oracle system aggregates data from multiple sources to ensure price accuracy and prevent manipulation.
- Governance by MKR Token Holders: MKR token holders have voting rights on crucial parameters like collateral types, stability fees, and DSR, ensuring community-driven evolution of the protocol.
Key Advantages:
- Transparency and Decentralization: All actions are on-chain and auditable, fostering trust and censorship resistance.
- Permissionless Borrowing and Lending: Anyone can participate by locking up collateral and minting DAI or supplying DAI to earn interest.
- Integration with DeFi Applications: DAI serves as a stable unit of account within the DeFi ecosystem, facilitating lending, borrowing, trading, and other financial activities.
In Conclusion:
DAI’s algorithmic approach to maintaining a dollar peg and its deep integration with DeFi protocols solidify its position as a cornerstone of decentralized finance. Its ongoing development by the MakerDAO community promises continued innovation in the quest for a more open and inclusive financial system.
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