Why would you want to hold cryptocurrency when it only appears to be going up? Wouldn't you rather have something that stayed the same or grew in value? For instance, you could deposit one U.S. dollar into an interest-bearing savings account and receive $1.00 in interest after one year. The money would stay the same even as prices rose around it. Now imagine if your savings kept its value even as the currency depreciated 10–20% every night due to inflation! That's exactly what Dai Stablecoin provides for Ethereum!
Dai Stablecoin Price Appreciation Due to Stabilization Mechanisms When held onto for one year, the price of Dai will appreciate at roughly 2% per month. It will also rise with ETH when it appreciates or depreciate when ETH deflates (or is worth less). The most important thing to understand about Dai is that it's not backed by any physical assets like gold is. Instead, it's backed by Ether (ETH) in a special kind of Ethereum smart contract called a collateralized debt position (CDP).
Fabian Vogelsteller (one of the original founders of Ethereum) created this CDP smart contract infrastructure–and he refers to these CDPs as "smart bonded tokens." Here are some excellent YouTube tutorials on how they work:
To summarize, Dai Stablecoin is based on the economy of supply and demand. It's designed so that an increase in demand causes a corresponding increase in price, which causes an increase in issuance of new Dai. This allows people to temporarily take out loans at 0% interest rates to purchase things they want now but can't afford with just their current income. The loans are paid back over time by purchasing more Dai with the proceeds from whatever it is that they're producing/selling/gaining as income (the actual value isn't important; it could be anything).
When there is insufficient demand for using the full amount of CDPs, then deflation occurs because less new Dai will be created than what was initially lent out. This results in a decrease in the price of Dai as CDPs are closed. This increase in supply from deflation is once again spread throughout the entire market via an algorithmic "bond curve" that incentivizes people to buy cheap and sell dear over time.
The Benefits of Stablecoin Collateralized Debt Positions Why does stable cryptocurrency matter? Perhaps one of the most significant reasons why Dai Stablecoin matters for crypto investors is because it's perfect collateralized debt obligations (CODLs) for Ethereum HODLers! By leveraging blockchain technology to represent claims on other assets, CODLs allow people to hedge against volatility without limiting their participation in the market.
Why would you want to hold cryptocurrency when it only appears to be going up? Wouldn't you rather have something that stayed the same or grew in value? For instance, you could deposit one U.S. dollar into an interest-bearing savings account and receive $1.00 in interest after one year. The money would stay the same even as prices rose around it. Now imagine if your savings kept its value even as the currency depreciated 10–20% every night due to inflation! That's exactly what Dai Stablecoin provides for Ethereum!
Dai Stablecoin Price Appreciation Due to Stabilization Mechanisms When held onto for one year, the price of Dai will appreciate at roughly 2% per month. It will also rise with ETH when it appreciates or depreciate when ETH deflates (or is worth less). The most important thing to understand about Dai is that it's not backed by any physical assets like gold is. Instead, it's backed by Ether (ETH) in a special kind of Ethereum smart contract called a collateralized debt position (CDP).