What purpose serve Smartcoins?
Dai is a proposed solution to generate stable currency on the Ethereum blockchain, just like Smartcoins as bitUSD, bitCNY or the Hero. The basic principle is the the same with Dai and bitshares Smartcoins. The token is issued by locking collateral in a smart contract. This collateral can be BTS or ETH. External price feeds post the current price of the token in comparison to the collateral on the blockchain. On the bitshares blockchain there are oracles that post the current price of BTS in USD in a way that allows the usage of this information to automate the liquidation of the collateral.
Why would the collateral have to be liquidated?
The important fact is that the value of the collateral has to be more than the value of the backed token. How much collateral is needed is a parameter of the system. Lets assume a target ratio of 1:2, which means that there is a minimum of 2 times more collateral than actual value of the backed token by the time of creation. This ratio moves around, when the price of the collateral changes. To keep the price stable, external actors try to buy and sell collateral and smartcoins around the target price. But in case the value of the collateral drops below a treshold, lets say a 1:1.5 ratio, it has to be refilled by the owner of the smart contract which locked the collateral. This happens in a margin call. If the value of the collateral drops further under a liquidation treshold, the smart coin will be bought back at maket price with the remaining collateral.
Why would someone do this?
The creators of the smart contract expect the value of their collateral like BTS or ETH to rise. So they lock 2 USD worth of ETH to get 1 USD worth of Dai and sell the Dai again for ETH. After the price of ETH compared to USD went up, they can buy back the Dai for less ETH and destroy the smart contract to unlock their collateral. Thus they have more ETH than before. This model was invented by Bitshares Smartcoins, and on the bitshares DEX you can trade Gold, Silver, BTC, EUR or index funds in form of their digitally pegged counterparts (bitUSD, bitBTC,...).
What makes Dai special?
Dai takes the concept a step further by allowing potentially everything that is a ERC20 token on the Ethereum blockchain to become a collateral for Dai tokens. A voting mechanism allows holder of a share in the associated DAO to set different parameters for every type of collateral. The Dai DAO generates income by collecting interest from the holder of smart contracts, just like interst is paid when taking a loan. Also there is a penalty of 5% when a smart contract has to be liquidated, which goes to the DAO as well. The interest is not collected directly, but used to buy back shares in the DAO and burn them with the goal of raising the remaining shares value.
For this reason there is a marketing fund that can pay developers and run a centralized marketing entity that can be addressed by external stakeholders like government agencies to support adoption or give money to charity projects.