The article examines DAI, a stablecoin in the MakerDAO ecosystem, highlighting its mechanism for maintaining stability amidst market pressures. It explains how DAI allows users to lock collateral, such as Ethereum, in a smart contract through Collateralized Debt Positions (CDPs). By requiring over-collateralization (at least 150%), DAI creates a cushion against market volatility, ensuring its peg to the US Dollar. The focus of the analysis rests on DAI's single collateral form, SAI, which effectively illustrates the fundamental workings of DAI's stability protocol prior to its evolution to a multi-collateral system.
DAI operates by enabling users to lock collateral in a smart contract, a process known as opening a Collateralized Debt Position (CDP). This ensures over-collateralization, usually requiring a collateral value exceeding the DAI's value by at least 150%. This buffer is crucial for absorbing market volatility and maintaining the peg to the US Dollar.
An analysis of DAI's mechanism reveals its reliance on decentralized protocols to maintain stability, showcasing how synthetic assets can effectively track their underlying value amidst market fluctuations.
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