Decentralized Bailouts With Ethereum

The Dai credit system whitepaper is decentralized monetary policy, enforced through mathematical contracts in ethereum instead of legal contracts enforced by a central authority. In this case two tokens are issued on the ethereum blockchain, the Dai and the Makercoin. Dai is created by users locking up collateral such as bitcoin or another blockchain-based asset (using an ethereum script similar to bitcoin’s OP_CHECKLOCKTIMEVERIFY). This means the value of all Dai is backed by the value of collateral obligations that are locked using an ethereum script. Thus intuitively, when the value of the underlying collateral assets goes to zero, the value of the Dai should go to zero.

However, the Dai is “insured” by a second token, the Makercoin. Makercoin programmatically increases its inflation rate to “bail out” the Dai if the Dai’s value drops. Makercoin holders are incentivized because they earn interest when the Dai’s value doesn’t drop — they are betting on the stability of the Dai’s underlying collateral assets.

Still wrapping my mind around how this works, but this is a pretty fascinating example of how ethereum contracts may decentralize complex financial products like ETFs and insurance.