Bitcoin Global News (BGN)
April 17, 2018 -- ADVFN Crypto NewsWire -- 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 (USDTUSD) was also trading at exactly
one dollar with a circulating supply of just about 2.3 billion
coins.
By: BGN Editorial Staff