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October 16, 2018

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DAI Coins: The New and Improved Tether?: A Brief Overview

April 17, 2018

 

Tether is the oft-criticized stablecoin of the crypo-industry. It’s important to remember that Tether’s supposed reserves are in USD, which makes it a supposed stablecoin. 

 

Tether’s problems seem to begin with the fact that we can’t seem to prove that it has the cash reserves that it says it has. It doesn’t help that seemingly, a professional audit on Tether hasn’t been finished, up to now. 

 

In the midst of this confusion comes the Maker DAO platform, complete with two coins. The Maker coin serves to govern the Decentralized Autonomous Organization that runs the platform while the DAI coin serves as the stablecoin issued by the platform. For the purposes of this piece, we’ll stick to the benefits of the DAI coin now and as proposed for the future. 

 

Maker’s DAI coin is different. DAI doesn’t depend on reserves of USD and is currently using Ether as its’ collateral for the DAI coin. What this means is that its’ reserves are entirely in Ether, at this time. 

 

One might ask: how is using Ether helpful, given its relative volatility? In their white paper, the DAI coin creators claim the primary reason of the usage of Ethereum (ETH) based smart contracts is to keep the DAI coin pegged to the USD, one to one. Specifically, this means that every user who sells Ether to the DAI Coin ecosystem’s smart contract gets an equivalent number of DAI coins in relation to the dollar value of Ether that they contribute. In effective, this contract is the same as a collateralized debt position in a traditional financial market. 

 

Theoretically, at least, the user can recapture his or her Ether at any time, but if it falls in value after he or she sells it to the smart contract, then the user has to pay the difference in debt before retrieving his or her Ether. 

 

To fix such a situation, the smart contracts running the DAI coin and the Maker DAO have mechanisms like partially liquidating their ether collateral in order to re-stabilize the DAI coin’s price. 

 

This liquidation is automatically done just before the price of Ether falls below the equivalent price of the amount DAI that it is backing. At the same time, the system also dilutes its entire pool of Ether to recapture the value of one DAI to one USD. 

During this process, the part of the pooled Ether that makes the user’s debt position uneven is sold off to other users in the ecosystem, who can purchase it with their DAI coins. In effect, this is the same as purchasing a debt position in a traditional financial market. 

 

When this liquidation ends and the user’s position is considered stable minus what the Maker DAO calls the stability and liquidity fees, the user then receives the Ether that is equal to the DAI they originally purchased. 

 

Through mechanisms like this and others, the DAI coin has remained quite close to a 1-to-1 ratio to the USD, consistently.  Over time, it is hoped that the potential of this coin and its ecosystem can be further analyzed in order to fully understand what it can do for the crypto space. This is particularly important given that the Maker DAO plans to take on more than just Ether as collateral, over time.  

 

At the time of this article, DAI was still trading at exactly one dollar with a circulating supply of just over 24.3 million coins, while Tether was also trading at exactly one dollar with a circulating supply of just about 2.3 billion coins. 

 

 

By: BGN Editorial Staff

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