MakerDAO and DAI: A new era of decentralized finance

The core mechanism of MakerDAO and DAI

MakerDAO is a decentralized project based on the Ethereum blockchain focused on creating and managing DAI, a stable and U.S. dollar-pegged digital currency. Unlike traditional centralized stablecoins such as USDT, DAI maintains value in a decentralized manner, relying on smart contracts rather than centralized credit.

The process of generating DAI

Users generate DAI by staking ETH. For example, if the market value of ETH is $1,000, a user may be able to generate approximately $500 of DAI, depending on the collateralization rate set by the MakerDAO system. This process not only provides liquidity but also allows users to earn stablecoins while maintaining control over collateral assets.

DAI redemption and ETH liquidation

In order to get back the staked ETH, the user needs to pay back the same amount of DAI plus possible fees. If market fluctuations cause the value of ETH to decrease, the value of the collateral may fall below a safe level, in which case the system will automatically liquidate. For example, if the value of ETH drops sharply to a collateralization ratio of 150%, the CDP will trigger liquidation. In this case, the user may face additional fines or losses.

MakerDAO’s advantages and future prospects

MakerDAO provides a transparent, decentralized financing method that traditional financial institutions cannot match. By automating the management of risk and debt through smart contracts, MakerDAO and DAI demonstrate the huge potential in the field of DeFi (decentralized finance), heralding a major change in the financial industry.