Skip to main content

Why is it that DAI cannot maintain parity with the Dollar?

If a participant in the ecosystem decided to save that DAI (not spend it), some borrower will have difficulties paying their loan (plus interest), entering into default.
| CryptoPress
 | Last updated: July 1, 2023
| CryptoPress
Last updated: July 1, 2023

CryptoPress

DAI is a stablecoin that is issued when someone asks for a loan, therefore every DAI in circulation is someone’s debt. If a participant in the ecosystem decided to save that DAI (not spend it), some borrower will have difficulties paying their loan (plus interest), entering into default.

This is exactly the same as in the traditional financial system. The collective imagination thinks that banks lend the deposits they previously received. This is wrong, banks magically issue money when they make loans.

As you can see, in the same way as in the case of DAI, in the traditional financial system every dollar that circulates is a dollar that someone owes. Therefore, if someone decided to save that dollar and not spend it, at least one borrower would not be able to repay their loan.

To avoid permanent defaults in the chain, you need someone who can borrow unlimitedly.

The one that indebts unlimitedly is the government. Every time the government runs a fiscal deficit (it spends more than it collects) it is getting into debt.

One dollar is a tax credit from the United States government, which agrees to accept that currency for tax payments. Remember that the counterpart of a loan is always a debt.

Proposed solutions for DAI parity

One option that was analyzed was to add centralized stablecoins (Tether, USDC, etc.) as possible collaterals. In this way, whoever needs DAI could issue them via a CDP with collateral in those crypto dollars since these ultimately arise from the US fiscal deficit.

The problem with this option is that the DAI system would be losing its essence of being a 100% decentralized stablecoin because it would depend on the trust in the issuers of said stablecoins.

On the other hand, an option that Maker founder Rune Christensen is pushing would be to add more types of collateral. The idea is that, the greater the amount of collateral, the higher the DAI issuance, which will generate more supply and therefore lower price.

One last proposal is to add collateral from the real world such as Real Estate. This is an alternative to consider as it would open the door for DAI to have much more interesting uses than it currently has. 

Anyway, you would have the same problem as with Tether or USDC. By having to trust an intermediary to protect the property of the Real Estate, decentralization would be lost.

© 2024 Cryptopress. For informational purposes only, not offered as advice of any kind.

Related

© Cryptopress. All rights reserved.