Lesson 3: How does DAI stabilize its price?

How is Dai issued?

As we learned in Lesson 2, Dai uses a fixed asset such as Ether or BAT as collateral to stabilize the price.

At this point, a mechanism called vaulting becomes important.

In order to issue Dai, collateral assets backing the value are deposited into a Vault, and then Dai is issued.

The Vault has a feature called Smart Contracts, where a program automatically handles the process.

The issued Dai can be returned to the collateral asset at any time.

To do so, a fee called the Stability Fee must be paid.

The Stability Fee plays an important role in stabilizing the price of Dai.

What you need to know about Smart Contracts

Now that we've covered some of the more esoteric terms, it's time to understand smart contracts.

First of all, let's understand what a smart contract is.

A smart contract is a computer program that automatically executes the contents of a contract.

In short, a smart contract is one that takes a certain set of actions (execution) for a certain set of actions (contract contents).

In a smart contract, the contents of the contract and the conditions for its execution are pre-programmed, and the contract is automatically executed when the conditions are met.

This mechanism has made it possible to exclude third parties from transactions that could not be realized without them.

By combining this smart contract with the blockchain, it is possible to ensure the transparency of contracts.

Because of the need to exclude certain administrators when issuing Dai, MakerDAO developed the Vault with smart contract functionality.

Let's understand the mechanism of price stability of Dai - Stability Fee

As we learned earlier, Dai can be returned to the collateral asset by paying a fee called the "Stability Fee".

This stability fee plays an important role in stabilizing the price of Dai.

In general, the price of things, not just currencies, is determined by supply and demand.

Naturally, the supply and demand of Dai is also subject to change.

Therefore, in order to function as a stablecoin, supply and demand must be adjusted in some way.

This is the Stability Fee.

Even if the supply and demand of Dai fluctuate, the Stability Fee can be adjusted to maintain the value of 1Dai = 1 dollar by changing the fee.

The Stability Fee is especially useful when you want to adjust the supply of Dai.

When the demand for Dai falls and the supply becomes excessive, the price of the Stability Fee can be increased to reduce the selling pressure of Dai.

Understanding the mechanism of Dai price stability - Dai Savings Rate

Another mechanism to stabilize the price of Dai is the Dai Savings Rate (DSR).

The DSR is a mechanism that allows you to earn a certain amount of interest by saving your Dai.

This is truly a bank without a specific manager.

With this DSR, it is possible to adjust the demand for Dai.

For example, if the demand for Dai goes down, the interest rate given for depositing Dai in the DSR can be increased to boost the demand.

There are many technical terms in MakerDAO that may seem difficult to understand.

There will be more to come in the lessons that follow, but it's not that difficult to understand if you take the time to learn them one by one.