DAI
Market Cap: $8.65 billion USD as of 26-April-2022
Contract:
Collateralization Mechanism & Detail: DAI was conceptualized as a 100% blockchain-native stable coin. The stablecoin is minted via a Collateralized Debt Position, in which an unstable asset (originally ethereum) is deposited and exchanged for DAI. Because ETH fluctuates quite rapidly, CDP’s must have been collateralized at 150%. That way, if the value of the backing asset plummets, the CDP can be liquidated and auctioned off for DAI. When the Maker repossesses the DAI, they are destroyed, in theory returning the price to a 1:1 peg with the dollar.
The same can happen in reverse, when demand for DAI causes the price to move over 1 dollar, incentives are put into place for more DAI to be minted via CDP, increasing supply and reducing price.
History/Context + Risk Assessment: The Maker DAO launched their first stablecoin in 2017 as a single collateral DAI, known as SAI. “Single collateral” refers to the fact that you could only mint DAI using ETH in a CDP. In 2019, Maker launched a new, multi collateral DAI which enabled tokens to be minted with different assets. With the initial multi-collateral launch, CDPs supported Eth and Basic Attention Token (BAT); however they have subsequently expanded to support over 25 tokens as collateral, with collateral ratios varying based on the stability.
While the thinking behind DAI is mechanically sound, it also relies on a completely efficient market. As such, Dai has not been able to maintain a perfect peg to the dollar. The token has reached a high price of $1.10 and a low price of $.96.
The continued growth of DeFi has caused an increase in demand (and price) for the token. To combat the issue, Maker is now allowing DAI to be collateralized by other centrally-reliant stablecoins such as USDC at a much lower collateralization rate of 101%. By allowing 100 DAI to be collateralized 101 USDC, Maker is ensuring that the price does not move more than 1% higher than USD because traders have an instant arbitrage opportunity. However, this also exposes DAI to all of the risk of USDC, including the possibility of USDC being blacklisted or regulated which could result in the price of DAI plummeting. Currently DAI is collateralized as much as 60% by stablecoins.
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