Stablecoins are becoming more relevant as investors are looking for a Cryptocurrencies that are less volatile.
Although the significance of Stablecoins may not be a priority at this point given the bullish conditions in the Crypto market, it is an open secret that the rally will end and a correction will follow. This consolidation of the growth may offset the gains and lead to a long period of stagnation.
However, the importance of Stablecoins cannot be overstated given the massive potential that the version of Tokens proffers. For instance, they are ideal for use on e-commerce and store-based points of sales that accept Cryptos. This is because merchants who accept the Token are assured that the Digital Assets that they hodl as cash-in-business cannot lose value in bear cycles.
DAI Is A Revolutionary Cryptocurrency
One of the leading Cryptocurrencies that is modeled as a Stablecoin is DAI. This is not an ordinary Stablecoin since it is backed by ETH and not actual Dollars as is the case for Tether (USDT) or TrueUSD (TUSD).
Other Stablecoins such as the TUSD only allow users to participate in the formal monetary economy.
A Hybrid Stablecoin
The conventional Stablecoin are assigned to buyers at a ratio of 1:1 usually to the US Dollar. They are redeemable at any time for Fiat currencies and they have relatively high liquidity in the real world.
But rather, DAI buyers have to deposit Ether into the Collateralized Debt Position (CDP). The CDP is a smart contract that issues DAI Tokens that are pegged to the market value of the Ether collaterals in US Dollars.
The use of the US currency in the equation is complex and elaborate since the ETH collateral that buyers submit in exchange for DAI Coins is the looked at from the USD standpoint which is used to value the DAI Tokens. This means that DAI Tokens are pegged on USD but backed by ETH Tokens.
The MakerDAO System Maintains The Dollar-Denominated Backup
The DAI Token is looked at from the standpoint of US Dollars rather than ETH Tokens which are themselves volatile which makes their use as backups defeat the purpose of creating a Stablecoin.
Consequently, the complex nature of the DAI Token means that there has to be a system of incentives called the MakerDAO system whose role is to ensure that the DAI Tokens are pegged against the US Dollar at a stable ratio.
Therefore, DAI’s full collateralization model is more complex as in addition to offering ETH Tokens whose value is determined from a USD point of view, users need to deposit a further 50% of the “stability rate” as insurance against ETH’s fluctuation in a bear market cycle.
This “interest rate” is determined by stakeholders and its role is to ensure that the contract does not liquidate. This rate started the year at 3.5R but has since surged to 19.5% as of May 1st.
The Importance Of DAI
It is no brainer that DAI is overcollateralized. This is a huge pro as it, therefore, becomes more stable and a truly decentralized Crypto since it is very loosely linked with FED-controlled USD.
For this reason, DAI is ideal for real world uses such as buying goods and services in the online and point-of-sale market, mortgage repayment, etc.
Additionally, following a surge in the number of ETH locked in the Maker contracts, ETH has been made to be less volatile and this is being viewed as a remedy for volatility.