Sai
Dai is a stablecoin. It is an Ethereum ERC20 token pegged to 1 USD USD—the value of each Dai is 1 USD, and its value will always be 1 USD. There is no centralized institution like Tether backing its value, nor any traditional bank backing each Dai with real US USD. Nothing can shut it down, and there is no centralized institution that needs to be trusted. Dai exists entirely on the Ethereum blockchain and uses smart contracts. *Features of Dai: 1. Each Dai is always worth 1 USD 2. It can be freely traded like any other ERC20 token 3. Anyone with an Ethereum wallet can hold, receive, and transfer it 4. It can be exchanged without any intermediaries 5. No individual or company can control it 6. No government or institution can shut it down *How does Dai work? Dai is a masterpiece of game theory that carefully balances economic incentives in pursuit of one goal—a token whose value continually approaches 1 USD USD in value. When the value of Dai is higher than 1 USD, mechanisms come into play to lower its price. When the value of Dai is lower than 1 USD, mechanisms come into play to raise its price. Rational actors participate in these mechanisms because they can earn a return whenever Dai is not worth exactly 1 USD. This is why the value of Dai always fluctuates slightly around 1 USD—like an infinite wave function that keeps bouncing within an infinitely narrow range around 1 USD, yet never truly reaches that value. The farther Dai deviates from 1 USD, the stronger the incentive to correct it. This is the magic of Dai. *How is Dai created? Dai is essentially a collateralized loan on Ethereum. Using the MakerDAO decentralized application, advanced users can borrow Dai against their ETH holdings as collateral. First,ETH is converted into “wrapped ETH”（WETH), which is essentially a layer of ETH wrapped around ERC20. This tokenizes ETH so that it can be used like any other ERC20 token. Next,WETH is converted into “pooled ETH”（PETH), meaning that it joins a large Ethereum pool containing the collateral for all Dai that has been created. Once you have PETH you can create a “Collateralized Debt Position” (CDP), which locks your PETH and allows you to borrow Dai against the collateral, which is PETH. As you borrow Dai, the debt ratio in CDP increases. The debt ceiling determines the maximum amount of Dai you can borrow against your CDP. Once you have Dai, you can freely spend or trade it like any other ERC20 token. *Despite the cumbersome process, there are several important reasons why you might create Dai: 1. You need a loan and own an asset (ETH) that can be used as collateral for the loan 2. You believe that the value of ETH is rising. You can use CDP for margin trading to buy ETH—you will lock ETH in CDP, borrow Dai against it, and use the Dai to buy more ETH on an exchange, then use that ETH to further increase the size of your CDP. This can be done without approval from any third party or centralized institution—margin trading can take place entirely on the blockchain. 3. Demand for Dai has pushed its price above 1 USD USD. When this happens, you can create Dai and immediately sell it on an exchange at a price higher than 1 USD USD. This is essentially cost-free capital, and it is one of the mechanisms the Maker system uses to keep Dai pegged to 1 USD USD. A value of Dai above 1 USD USD encourages the creation of more Dai. These three reasons are sufficient to ensure that Dai will continue to be created.
Overview
Dai is a stablecoin. It is an Ethereum ERC20 token pegged to 1 USD USD—the value of each Dai is 1 USD, and its value will always be 1 USD. There is no centralized institution like Tether backing its value, nor any traditional bank backing each Dai with real US USD. Nothing can shut it down, and there is no centralized institution that needs to be trusted. Dai exists entirely on the Ethereum blockchain and uses smart contracts. *Features of Dai: 1. Each Dai is always worth 1 USD 2. It can be freely traded like any other ERC20 token 3. Anyone with an Ethereum wallet can hold, receive, and transfer it 4. It can be exchanged without any intermediaries 5. No individual or company can control it 6. No government or institution can shut it down *How does Dai work? Dai is a masterpiece of game theory that carefully balances economic incentives in pursuit of one goal—a token whose value continually approaches 1 USD USD in value. When the value of Dai is higher than 1 USD, mechanisms come into play to lower its price. When the value of Dai is lower than 1 USD, mechanisms come into play to raise its price. Rational actors participate in these mechanisms because they can earn a return whenever Dai is not worth exactly 1 USD. This is why the value of Dai always fluctuates slightly around 1 USD—like an infinite wave function that keeps bouncing within an infinitely narrow range around 1 USD, yet never truly reaches that value. The farther Dai deviates from 1 USD, the stronger the incentive to correct it. This is the magic of Dai. *How is Dai created? Dai is essentially a collateralized loan on Ethereum. Using the MakerDAO decentralized application, advanced users can borrow Dai against their ETH holdings as collateral. First,ETH is converted into “wrapped ETH”（WETH), which is essentially a layer of ETH wrapped around ERC20. This tokenizes ETH so that it can be used like any other ERC20 token. Next,WETH is converted into “pooled ETH”（PETH), meaning that it joins a large Ethereum pool containing the collateral for all Dai that has been created. Once you have PETH you can create a “Collateralized Debt Position” (CDP), which locks your PETH and allows you to borrow Dai against the collateral, which is PETH. As you borrow Dai, the debt ratio in CDP increases. The debt ceiling determines the maximum amount of Dai you can borrow against your CDP. Once you have Dai, you can freely spend or trade it like any other ERC20 token. *Despite the cumbersome process, there are several important reasons why you might create Dai: 1. You need a loan and own an asset (ETH) that can be used as collateral for the loan 2. You believe that the value of ETH is rising. You can use CDP for margin trading to buy ETH—you will lock ETH in CDP, borrow Dai against it, and use the Dai to buy more ETH on an exchange, then use that ETH to further increase the size of your CDP. This can be done without approval from any third party or centralized institution—margin trading can take place entirely on the blockchain. 3. Demand for Dai has pushed its price above 1 USD USD. When this happens, you can create Dai and immediately sell it on an exchange at a price higher than 1 USD USD. This is essentially cost-free capital, and it is one of the mechanisms the Maker system uses to keep Dai pegged to 1 USD USD. A value of Dai above 1 USD USD encourages the creation of more Dai. These three reasons are sufficient to ensure that Dai will continue to be created.