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I read the materials, and I still can't figure it out. You have also done your research, and apparently do know why Dai is stable to the USD. I'm just curious w
by ppf 7y ago
I read the materials, and I still can't figure it out. You have also done your research, and apparently do know why Dai is stable to the USD. I'm just curious what that mechanism is, and why you can't explain it. I did read your very long answer elsewhere, but that's an overview of the entire Maker system, and at no point does it explain which part does the "stabilizing", apart from a vague reference to "incentives". What are they?
- Legogris 7y agoOversimplifying a bit here at the price of accuracy and completeness, but mainly arbitrage. Ceiling is easy; if the market price is > 1$, it is free money to create new CDPs and sell the DAI off for ETH on the market. If the ETH/USD price goes down, so does the capitalization ratio of CDPs. If a CDP goes low enough, users have to either repay their DAI debt (removing DAI supply from market) or rebalance by depositing additional ETH collateral. Otherwise, their position will be liquidated (which means the CDP owner loses their collateral) and their ETH collateral is put up for public sale for DAI on-chain. The DAI used to pay at these sales is destroyed. This creates an incentive for people to burn DAI to acquire ETH below market price (thus creating demand for DAI). Also in general I advise you to ask clarifying questions rather than post scoffy dismissals if you know that your understanding might be incomplete.