Are cryptocurrencies better than regular money? As they were initially created as a step up, they should be. Imagine a perfect coin: fungible, portable, tradable, durable, valuable and… stable. Now, take Bitcoin and check if it ticks all the boxes. Although it fits most of the criteria, stability is not yet on the list. The major problem all cryptocurrencies share is their high volatility.
“But there must be some stablecoins out there,” you might argue, and as a matter of fact, you would be half-right. The coins that already exist are ‘backed’ by actual dollars and depend on bank accounts, which are not exactly part of the blockchain.
However, the future is bright. Meet Dai — the first stablecoin that offers a real, blockchain-based solution against volatility.
So What’s the Story?
Maker DAO is a decentralized organization that wants to bring stability to the crypto world. In 2017, they issued an asset-backed, hard currency on the Ethereum blockchain called Dai. It is pegged to the USD and uses collateral and interest rate mechanisms to back its value. Sounds complicated, right? Well let us break it down for you..
How It Works
Let’s say you have a collateral asset and want to get yourself some Dai. You can get it on Maker platform by activating a smart contract, aka a Collateralized Debt Position — or CDP. You send a transaction to the platform in order to generate Dai and fund it with certain collateral. After that, you will be able to send another request to the platform specifying the desired amount of Dai, and that’s when the CDP accrues an equivalent amount of debt. You can’t ask for the collateral back until you pay the debt as well as Stability fee in MKR (Maker’s ERC20 token).
What About Price Stability?
The Dai Target Price is tightly pegged to the USD so that 1 Dai equals 1 USD. There are a few mechanisms that ensure its stability.
Borrowing Dai becomes more expensive when the price is below target. At the same time, if the price goes above the target — creating new Dai becomes cheaper, and this also affects the total amount of existing Dai.
Another mechanism includes liquidating CDPs when underlying collateral falls too far in value. If this takes place, the collateral needs to be sold off to cover the Dai buyback and Keepers are in charge of this process. They scan the blockchain to liquidate risky CDPs and receive small fees for their work, whereas the access proceeds are returned to the original borrower.
Who’s Gonna Benefit from It?
Basically, anyone can take advantage of Dai.
- Individuals get a safe way to store their crypto assets as well as spend Dai itself.
- Long-term betting becomes safer as you don’t have to gamble on the future price of your asset.
- Without volatility, lenders and borrowers get a safer cooperation environment.
- Not to mention, stable capital can significantly reduce the costs of international trade.
“For the crypto economy to grow at scale, people need access to a decentralized, collateral backed stable store of value,” said Rune Christensen, CEO and co-founder of MakerDAO. “That’s why we developed Dai. Lumi provides MKR holders with a wonderful option for securely storing and sharing their tokens.”
The Lumi team is very excited about the idea of bringing stability to the crypto world and believes that noble objectives deserve genuine support. With Lumi Wallet, you can contribute to Maker’s project by keeping, sending and exchanging MKR.
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