What is Dai (DAI)? Dai is a stablecoin pegged to the US dollar that maintains its peg due to collateralized debt positions (CDPs) created through smart contracts on the Ethereum blockchain. Dai differs from other stablecoins in the sense that it is fully decentralized and does not rely on trust as is the case for other stablecoins.
A person can create DAI by locking at least 1.5 times the amount of ETH in a CDP and they must maintain this ratio to prevent the liquidation of the CDP. For example, if a user locks $100 of ETH they can generate up to $66.66 of DAI. The person can then reclaim their ETH by paying the DAI back plus a stability fee. This DAI is then destroyed and removed from circulation.
The stability fee is a tool of Dai’s decentralized monetary policy. When the price of Dai drops below $1, increasing the stability fee makes creating Dai more expensive, which should lower the supply of Dai, which drives up the price. When the price of Dai exceeds $1, decreasing the stability fee makes creating Dai less expensive, which should increase the supply of Dai, which lowers price. The stability fee is not centrally decided, but decided by the votes of MKR (Maker’s governance token holders).