When trading cryptocurrencies traders often want to trade out of volatile currencies and into something more stable. Most traders use Tethers USDT, but many don’t trust them. This distrust arises out of the way in which they peg the coin to USD. Tether simply keeps the same amount of USD in the bank as USDT that they issue. Tether as failed to give us reliable audits and simply the fact that you must trust someone turns people off. So today we will learn about a coin which pegs itself to the USD in a completely decentralized way.
The coin is called Dai. Dai is a smart contract running on the ethereum network. The way that Dai is created is by opening a Collateralized Debt Position or CDP. Essentially you must deposit a certain amount of ether, let’s say 1 ETH, and get a loan of Dai on that either. Let’s say that you choose to draw out $200 of Dai. You can use Dai for whatever you want, but if you want your ether back then you must repay it. Also, if the value of ether decreases enough than the contract will liquidate it into Dai until it can close the CDP. In our case, it would have to drop to $200 for it to be liquidated. The reason it does this is to keep Dai valued at $1. If each Dai is collateralized with ether that is worth less than a $1 than a Dai isn’t worth a $1, is it? The contract does this constantly so that Dai will always be worth $1. You may be wondering what happens if ether crashes hard and ALL CDPs are undervalued. A few people have private keys which can start a liquidation that gives everyone the ether value of their Dai coins. While this is technically centralization there is very little harm that can be done by these people.
This is all really great, but you may be wondering how the contract knows what the current ether price is? Well, Dai has a system of “Oracles” that watch exchanges and bring the contract to consensus about the ether price. Another area of centralization is that oracles must be whitelisted by the dev team. This is planned to be phased out into a more decentralized method, but it is stuck like this for now. You can find more about the Oracle system HERE - https://developer.makerdao.com/feeds/.
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