MakerDAO DAI Stablecoin Grows By 50% in Two Weeks, Accounts For 1.4% of All ETH

 In just the span of less than two weeks, the amount of ether (ETH) tokens locked into the Dai (DAI) stablecoin has risen almost 50% to about 1.4 million ETH - or about 1.4% of the total current supply ether. The stablecoin’s tracking website mkr.tools indicates that roughly $174 million worth of ETH is currently locked into the system, propping up 285% worth of collateral. Speculating  as to the reasoning behind the accelerating usage, one can cautiously  observe an increased of DAI contract creation around the time bitcoin  crashed through its critial price level of $6,000, on November 14. 

 DAI (“dai” being the Chinese word for “lend”), the stablecoin of the MakerDAO project,  is a decentralized alternative to centralized stablecoins. Many  stablecoins have been released during 2018, but almost all of them are  centrally controlled by the companies or financial institutions which  claim to back each coin with one US dollar, with Tether (USDT) being perhaps the most notable example. MakerDAO’s DAI, instead, is backed by ETH tokens, and perhaps in the future more kinds of cryptoassets. (CryptoGlobe produced a two-part writeup on both types.) 

How Does It Work?

Although its purpose is very  simple - pair one-to-one with the US dollar - the DAI’s mechanism for  accomplishing its task is quite complicated. Essentially, a user can buy a DAI  token, representing $1, for the equivalent of $1.50 worth of ETH, plus a  small fee paid in MKR, MakerDAO’s other token. When the user wants to  retrieve this sum, they can repay the DAI token into the smart contract  and reclaim $1.50 worth of ETH. This entire process is the called a  Collateralized Debt Position (CDP). 

The 50% premium paid for the  privilege of using DAI is entered into MakerDAO’s insurance scheme,  which is used as a hedge in case of rapid changes in the price of ETH  tokens. By a combination of market forces and automated smart contract  functions, as well as a sort of sell-all 'nuclear' option (voted on by  the community), DAI value is meant to be guarded from extreme price  movements of its underlying coins. (A more thorough explanation can be  found in part two of our stablecoin guide.) Mike McDonald, creator of  mkr.tools, has observed that the amount of ETH being locked into the  MakerDAO system is outpacing the amount of ETH being created as a result  of mining.