Dai (DAI): A Deep Dive into Ethereum's Leading Decentralized Stablecoin

Dai is the largest decentralized stablecoin on Ethereum, developed and managed by MakerDAO. It serves as a crucial infrastructure for Decentralized Finance (DeFi). Backed by over-collateralized on-chain assets, Dai maintains a 1:1 peg with the US dollar (1 DAI = 1 USD). Individuals and businesses can access this safe-haven asset and gain liquidity by either exchanging for Dai or using collateral to borrow it. Dai has found real-world applications in various sectors, including lending, margin trading, international transfers, and supply chain finance.

The Maker Protocol

Also known as the Multi-Collateral Dai (MCD) system, the Maker Protocol enables users to generate Dai by leveraging collateral assets approved by "Maker Governance". Maker Governance is a community-driven process that manages all aspects of the Maker Protocol.

Dai, a decentralized, unbiased, and collateral-backed cryptocurrency pegged to the US dollar, offers protection against hyperinflation through its low volatility, providing economic freedom and opportunity globally.

I. Project Overview

Dai is a stablecoin backed by collateral assets, ensuring its price stability against the US dollar. Maker, a smart contract platform on Ethereum, utilizes Collateralized Debt Positions (CDPs), automated feedback mechanisms, and external incentives to support and stabilize Dai's price.

The Maker platform empowers anyone to leverage their Ethereum assets to generate Dai for leveraged operations. Once generated, Dai functions like any other digital currency: freely transferable, usable for purchasing goods and services, and suitable for long-term storage. Significantly, Dai's emergence is pivotal for robust, decentralized leveraged trading platforms.

Project Features:

In the Maker system, Dai's target price serves two critical functions:

1. Calculating the Collateralization Ratio: It determines the ratio of collateral to debt for CDPs.

2. Global Settlement Value: It sets the value of collateral assets that Dai holders will receive during a global settlement.

Initially pegged 1:1 with the US dollar, the target price will gradually transition to a soft peg.

Application Scenarios:

MKR holders can vote to participate in the following risk system actions:

• Adding New CDP Types: Creating new CDP types with unique risk parameters, either by introducing new collateral assets or combining existing ones.

• Modifying Existing CDP Types: Adjusting the risk parameters of one or more existing CDP types.

• Modifying Sensitivity Parameters: Altering the sensitivity of the Target Rate Feedback Mechanism (TRFM).

• Modifying the Target Rate: Adjusting the Dai target price, primarily used to anchor Dai's price to the current target price by simultaneously adjusting the sensitivity parameters.

• Selecting Trusted Oracles: Maker relies on a decentralized oracle infrastructure to obtain real-time price feeds for collateral and Dai. MKR holders control the selection and number of trusted oracle nodes.

• Adjusting the Price Feed Sensitivity: This determines the degree to which price feeds can influence the system's internal prices.

• Selecting Global Settlers: Global settlers are a crucial mechanism for the Maker platform to withstand oracle manipulation or governance attacks. MKR holders select them and determine how many are needed to initiate a global settlement.

Risk Parameters:

CDPs within the Dai stablecoin system have various risk parameters. Each CDP type has a unique set, determined by MKR holders through voting (one MKR equals one vote), dictating its risk profile.

Key CDP risk parameters include:

• Debt Ceiling: The maximum debt that a single CDP type can generate. Once reached, no new Dai can be created unless existing CDPs are redeemed. This ensures collateral portfolio diversification.

• Liquidation Ratio: The collateral/debt ratio when a CDP is liquidated. A lower ratio suggests lower expected collateral price volatility, while a higher ratio indicates higher expected volatility.

• Stability Fee: An annual fee paid by CDP holders, based on the generated debt, denominated in Dai but payable only in MKR tokens. The amount of MKR required depends on its market price. Once paid, MKR is burned and permanently removed from circulation.

• Penalty Ratio: This determines the maximum Dai used during a liquidation auction to buy and burn MKR supply. Remaining collateral is returned to the pre-liquidation CDP holder. This enhances the liquidation system's efficiency.

Technical Overview:

MKR Token Governance System:

Besides collecting stability fees from CDPs, MKR holders play a crucial role in governing the Maker platform. Governance occurs through MKR holder voting on proposals. Successful proposals are smart contracts that modify the Maker platform's internal governance variables.

Proposals come in two forms:

1. Single-Action Proposal Contracts: These execute immediately upon gaining root access, altering internal governance variables instantly. They are deleted and deactivated after execution, suitable for simpler actions but offering less flexibility.

2. Proxy Action Proposal Contracts: These use second-layer management logic with persistent root access, allowing for more complex governance models, such as scheduling recurring votes on risk parameters or limiting the scope of governance actions within a specific timeframe.

MKR and Multi-Collateral Dai:

With the upgrade to Multi-Collateral Dai, MKR replaces PETH's role in recapitalization. When a market crash triggers CDP under-collateralization, the system automatically increases MKR supply and uses it to repurchase sufficient funds from the market for system recapitalization.

Each CDP type has a unique liquidation ratio, determined by MKR holders based on the risk profile of its collateral assets. Liquidation occurs when a CDP falls below this ratio. The Maker platform automatically buys the CDP's collateral and gradually sells it.

Other Participants:

Beyond smart contracts, the Maker platform relies on external actors motivated by its economic incentives. Key participants include:

• Keepers: Independent, often automated, actors who contribute to the decentralized system, participating in debt and collateral auctions during CDP liquidations. Keepers also profit from arbitrage opportunities by buying or selling Dai when its market price deviates from the target price.

• Oracles: Providing the Maker platform with real-time price information for collateral assets and Dai's market price. MKR holders select trusted oracles that feed price data to the platform through Ethereum transactions.

• Global Settlers: Acting as a last line of defense during attacks on the Dai stablecoin system. Appointed and authorized by MKR holders, they can trigger a global settlement, a process that returns collateral to users and effectively shuts down the system in its current form.

II. Commentary

Dubbed the decentralized "central bank" on the blockchain, MakerDAO is a smart contract platform built on Ethereum. Users can collateralize other cryptocurrencies to generate Dai, a stablecoin pegged to the US dollar. Maker achieves complete decentralization through smart contracts; no single entity controls Dai's circulating supply, which is determined by user demand and market forces.

To address the inherent volatility of cryptocurrencies, Maker employs over-collateralization (above 150%). This excess collateral acts as a buffer, absorbing price fluctuations to stabilize Dai's value. Keepers profit from arbitrage opportunities, maintaining Dai's peg by buying or selling it when the price deviates. In extreme market volatility, the Global Settlement system activates, returning collateral to users and mitigating losses.

Generating Dai incurs a stability fee, currently at 3.5% per annum, payable in MKR or Dai. Liquidated CDPs are subject to a 13% penalty on collateral.

Related Links:

• https://makerdao.com/

• https://awesome.makerdao.com/

• https://makerdao.com/whitepaper/#abstract

Disclaimer: I am an AI chatbot and cannot provide financial advice. The information provided here is for general knowledge and informational purposes only, and does not constitute investment advice. Always conduct thorough research and consult with a qualified financial advisor before making any financial decisions.