Odaily Frontline | Can Dai change the rules of the "stable currency" game?

This article comes fromReuters, original author: Tom Wilson

Odaily translator |

This article comes from

Reuters

, original author: Tom Wilson

Odaily translator |

As we all know, stablecoins are issued as centralized asset-backed tokens, some backed by U.S. dollars, and others backed by gold. But the “stablecoin” we’re talking about now isn’t pegged to any major asset — it’s backed by another cryptocurrency.

Facebook's stablecoin Libra is a "new" cryptocurrency, unlike Bitcoin, which cannot be traded commercially due to wild price fluctuations. Stablecoins base their value on a more stable underlying asset, usually a traditional currency or a commodity.

But, unlike other stablecoins, Dai uses a volatile digital currency — ETH — to maintain a stable value.

It might seem counterintuitive, but Dai advocates say the way it works through "smart contracts" means Dai will always maintain a stable value while providing transparency.

Founded in 2017, Dai seeks to circumvent such concerns by relinquishing control of its pegged asset, ether, and instead locking it up in blockchain contracts run by algorithms. Proponents say the approach offers the benefits of stablecoins — instant transactions and stable value — while avoiding governance risks.

Meanwhile, Dai is gaining some traction: the charity Oxfam is testing whether to use Dai to distribute aid on a Pacific island; and some Argentinian savers are using the token to avoid high inflation .

How regulators treat Dai could help shape how, if it works, the cryptocurrency evolves from speculative use to a true online currency. But the regulator's response remains unclear.

Note: Reuters is tracking the emergence of Bitcoin's altcoins, or "altcoins," as assets that are attracting increasing attention from investors, regulators, businesses and individuals. The fourth in the series is all about Dai.

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How does Dai work?

Dai is actually pegged to the U.S. dollar and backed by ETH locked in publicly visible contracts on the blockchain.

Many stablecoins are trusted because their value is backed by central bank money. On the other hand, users trust Dai also because the ETH locked in the contract always exceeds the value of Dai in circulation.

When the value of Dai deviates too far from the dollar, the balancing mechanism guides its value back.。

“With a decentralized stablecoin, you can see everything on the blockchain,” explained Rune Christensen, founder and CEO of MakerDAO, the protocol that runs Dai. “Anyone can do a real-time audit.”

secondary titleWho is controlling Dai?。

Dai is not yet fully decentralizedThe Maker Foundation, registered in the Cayman Islands and operating in Copenhagen, oversees the technology.。

Also led by Christensen, the foundation develops the code and other projects,

Hope to make Dai and MakerDAO fully user-controlled

Mariano Conti, Head of Smart Contracts, stated,

"The idea is to bootstrap the system until it (the foundation) is no longer needed," said Conti, who is based in Buenos Aires.

But there are risks in the governance model.

Timothy Stranex, co-founder of London-based cryptocurrency exchange Luno, said flaws in smart contracts could make them vulnerable to exploitation and theft of assets stored on the blockchain.

MakerDAO said an "emergency shutdown" mechanism prevents the attack. If a user tries to take over the protocol, this mechanism will be triggered to protect staked tokens and return funds.

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What do regulators think about Dai?It's not clear yet.。

The G7 (Group of Seven) released a report on stablecoins last month, but stablecoins backed by cryptocurrencies were not included in the report. The report notes that the ability of stablecoins to maintain a stable value in the medium term is questionable.

The UK’s Financial Conduct Authority (FCA) said it did not use the term “stablecoin” because stability is purely an aspiration.

For Dai, a thorough case-by-case analysis is required

Stablecoins like Dai open up a new front for regulators trying to "tame" the rapidly changing crypto world, experts say.

“Regulators are trying to align existing frameworks with these new technologies,” said Phil Angeloff, a lawyer at law firm Clifford Chance who has worked on stablecoins.

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How does Dai perform in the real world?

Better than many cryptocurrencies that are primarily used for speculation.

Oxfam this year tested Dai's distribution of aid in the natural disaster-prone Pacific island nation of Vanuatu. The organization provided Dai to about 200 people and 30 vendors on one of Vanuatu's islands, building a small Dai-based economy.Oxfam's Sandra Hart is fond of Dai: "It increases our ability to control and allow us to interact economically more directly and quickly in the aftermath of a disaster."

Hart further said that another, larger pilot will be conducted in Vanuatu next year, this time across multiple islands.

In Argentina, where inflation is rampant, Dai is also attracting attention.

Data are scarce, but according to the Maker Foundation's Conti,