How Does DAI Maintain Its Value?

Dai uses game theory and carefully balances economic incentives to continuously sustain the value of $1. When single Dai falls below $1, the system incentivizes users to increase the price. When one Dai is worth more than $1, the incentives work the other way around. On any of these occasions, rational actors can make money due to the price swings. The further Dai deviates from the mean, the better incentives there are to fetch the price back to $1.

In addition to that, Dai coins are always over-collateralized. It means that instead of backing coins 1:1 with their underlying assets (Ether in this case), the ratio is always more than 1:1. For example, if Ether is worth $100 and the collateralization ratio is 150%, you can create 66 Dai.

What’s so special about it?

The price of DAI is kept in check through a system of smart contracts automatically executing themselves. If the price of DAI fluctuates too far from one dollar, Maker (MKR) tokens are burned or created in order to stabilize the price of DAI.

MakerDAO’s algorithms automatically manage the price of DAI so no one person needs to be trusted to keep the currency steady. If the system works as intended and one DAI equals one US dollar, MKR holders benefit because the total supply of MKR decreases–making MKR more rare and valuable.

To date, DAI has remained stable for over three years with only minor fluctuations from its one dollar price peg.