Dai, the first it decentralizes, collateral-backed cryptocurrency, DAI, is a crypto asset that attempts to maintain a stable 1:1 value with the U.S. dollar by locking other crypto assets in contracts.
It means that unlike other asset-backed cryptocurrencies, which for-profit companies may issue.
Also, it is the product of open-source software called the Maker Protocol, a decentralized request running on top of the Ethereum blockchain.
As such, it maintains its value, not existence backed by U.S. dollars custodied by a company.
Also but by using collateralized debt denominated in ether (ETH), Ethereum’s cryptocurrency.
If you are unfamiliar, collateralized loans provide a way for a lender to secure a loan using assets they own.
Also, historically, these loans take a lower interest rate than unsecured loans.
As they allow lenders to seize the asset and sell it in the event borrowers are unable to pay the loans.
And the Maker Protocol, through smart contracts running on Ethereum.
It enables borrowers to lock ETH and other crypto assets, thus collateralizing it to generate new DAI tokens in the form of loans.
How does Dai work?
Firstly it is a crypto asset collateralizes by other cryptocurrencies if users want to acquire DAI.
Secondly they can send ETH to purchase the dollar equivalent amount in DAI on an exchange or collateralize ETH and other assets using the Marker Protocol.
Lastly and the latter method allows users who do not want to sell their ETH to acquire it still.
Collateralized Debt positions
Collateralized Debt Positions (CDPs) intelligent contracts on the Maker Protocol.
And that users can leverage to lock their collateral assets (i.e., ETH or BAT) and generate DAI.
Also, CDPs can think of as secure vaults for storing the collateral above.
To account for the instability in the crypto collateral, it is often over-collateralized.
And the means that the amount of the deposit it requires is typically higher than the value of DAI.
For example, users must spend dollar 200 in ETH to receive a dollar 100 DAI.
Which intends to account for the potential decrease in the value ETH.
As a result, if ETH depreciates by 25%, the dollar100 in DAI can still safely collateralizes the dollar 150 in ETH.
To recover the stored ETH, the user returns the DAI and pays a stability fee.
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