Let's go extreme and say that Dai had no collateral at all. Let's say the demand for Dai decreased significantly, and it dropped below a dollar but was not over-collateralized. Having an excess of reserves increases investor trust and reduces Dai's exposure to market volatility.īut what if a stablecoin was not over-collateralized, and the market hit a rough spot? This is where problems start occurring. If any stablecoin is backed by crypto, which is subject to volatility, over-collateralization should always be the way to go. Keeping the Dai stablecoin over-collateralized in this way lowers the chance of Dai losing its peg. For every dollar worth of DAI borrowed, $1.50 of another crypto must be deposited (such as Ethereum or Chainlink). MakerDAO has a collateralization ratio of 150%. So, let's say an individual wants to loan 100 DAI tokens. You can also deposit DAI to earn rewards via MakerDAO. MakerDAO is a borrowing and lending platform that uses the Dai stablecoin (pegged to the US dollar), or DAI, as its borrowed asset. Let's consider the Maker DAO protocol to understand this further.
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