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MakerDAO (MKR) invented DAI, a decentralized stablecoin. One DAI equals one USD, implying that the 1:1 ratio will be maintained until the DAI is withdrawn from circulation.

What is Dai?

DAI maintains its stable value by shifts following market changes, thus keeping a steady price against other cryptocurrencies. The process is facilitated by the Maker platform along with the MKR token, CDP smart contracts, and several other stabilization mechanisms.

DAI is a genuinely trustless and decentralized stablecoin that cannot be shut down or censored because it is solely based on the Ethereum blockchain and smart contracts.

How does it work?

DAI maintains the value of $1 by carefully balancing economic incentives. When the price of a single DAI falls below $1, the system incentives users to raise it. When a DAI is valued more than a dollar, the incentives are reversed. Rational individuals can profit from price volatility in any of these situations. The more DAI deviates from the mean, the stronger the incentives to bring the price back to $1.

Furthermore, DAI coins are always over-collateralized, which means that rather than backing coins 1:1 with their underlying assets (in this case, Ethereum), the ratio is always greater than 1:1. You can create 66 DAI if Ethereum is valued $100 and the collateralization ratio is 150 percent.

Use in practice

As a crypto-collateralized stablecoin, DAI is collateralized with Ether. Any Ether holder can create DAI using MakerDAO DApp. DAI can be generated by locking in a collateral such as ether ETH, WBTC, LINK, or beyond when you open a Maker Vault. Then you can use DAI to borrow against your collateral. Because each Vault has its unique risk standards, the minimum collateral ratio varies between 101 and 175 percent. In other words, your Vault's collateral value to total debt ratio in DAI must be at least 101 percent. If the price of ETH (or any other token you’re investing in) goes up you make a profit, if it goes down you don’t.

How can I earn?

You're betting that the value of ETH will rise, and if it does, the ETH you're holding, as well as all of your locked ETH, will rise in value. You utilized ETH worth 150 percent of the DAI you borrowed at first. Now the same ETH is worth 175 percent of the borrowed Dai, all you have to do to get it back is repay the DAI, and you'll make an additional 25% profit. You will profit even more if you repeat the steps.


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