What Is Happening With DAI? - Stablecoin Not So Stable
Recently we can observe behavior in the price of the DAI that does not correspond to the principle established in its creation as a stable currency.
I am specifically referring to the fact that its price has remained above 1 USD throughout 2020.
This led me to reflect on the nature of DAI as a stable currency.
Dai, launched by MakerDao in Nov 2019, is a stablecoin based on the Ethereum network which pegs its value to the US dollar. In theory, its price should remain close to 1 USD.
This is achieved thanks to Smart Contracts that allow, through a loan system on the Ethereum network, to deposit Ether (Buy DAI) in a collateralized debt location, where all the Ether in exchange is generated. the corresponding DAIs tokens. All this in a well established Defi system.
Why would someone turn their ETHER into DAI?
The idea of a stablecoin is to protect capital from constant market fluctuations and ETH price volatility. In this way, a fall in ETHER prices would not represent a loss for the holders.
But what happens when the price of DAI fluctuates?
This is established by MKR token holders, based on supply and demand within the aforementioned loan system. This fee must be paid by DAI holders when they want to get their locked Ether back.
To unlock and get their ETH back, the Dai holder will simply have to pay Dai plus a stability fee. If the value of Dai falls below $ 1, this stability fee is increased to make Dai loans more expensive. If Dai loans are more expensive, fewer loans will be generated and the supply of Dai will be reduced, raising the price. Similarly, if the value of Dai exceeds $ 1 USD, the stability fee is lowered to make Dai loans cheaper, leading to increased supply in the market and lower prices.
So what is "failing" in the DAI system?
If prices are above $ 1, it means that stability fees should have dropped, making loans cheaper (DAI Price) and therefore increasing supply.
This directly affects the Market Capitalization, which we obtain by multiplying the current price x the total circulating DAI.
There is a fact that coincides with this growth in DAI's Market Capitalization.
As you can see in my graph, the Capitalization increases from July. It was on this date that Binance added DAI to its platform.
Perhaps we are not facing a "failure" in the system, but rather these "stable" prices that exceed 1 USD are caused with the intention of reducing loan rates and increasing Market Cap.
Who would be benefiting from this clearly irregular scheme?
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