After the Silicon Valley Bank crisis, like many stablecoins, the DAI price fell by about 14%!
DAI Stablecoin’s Value Declined
In recent days of high volatility in cryptocurrencies, the prices of almost all stablecoins, such as DAI, fell after Silicon Valley Bank announced its bankruptcy. However, before moving on to the reason behind this decline in stablecoins, it is worth mentioning what stablecoins are and what DAI is.
What is Stablecoin?
By definition, a stablecoin is a type of cryptocurrency whose value is tied to an asset, such as the US dollar or gold, to maintain a stable price. Stablecoins offer several benefits to users. One of the most important benefits is that they eliminate the need to rely on an intermediary to make payments. On the other hand, one of the disadvantages is that the price of cryptocurrencies can tend to fluctuate wildly, as the market is experiencing these days.
What is DAI?
This Coin is the first decentralized, collateral-backed stable cryptocurrency. This stablecoin is an ERC-20 crypto asset with the goal of achieving a stable value at a 1:1 ratio with the US dollar by locking other crypto assets in contracts.
One of the main differences between this stablecoin from other stablecoins is that it is not an asset issued and controlled by central authorities. This project is an open-source software product of the Maker Protocol, a decentralized application running on the Ethereum blockchain. As such, DAI can maintain its value by borrowing in ether (ETH), Ethereum’s cryptocurrency, rather than in US dollars backed by a corporation.
Secured loans provide a way for a lender to secure a loan by locking up assets they own. These secured loans have a lower interest rate than unsecured loans because they allow lenders to seize assets and sell them if the loans cannot be repaid.
How does It work?
DAI, Collateralized Debt Positions (CDPs), are smart contracts of the Maker Protocol where users can lock their collateralized assets (e.g., EHT or BAT) and create DAI.
This project is an important component of these Collateralized Debt Positions. CDPs can be thought of as safe deposit vaults to store the collateral that we mentioned at the top of this article. Due to the volatile nature of the collateralized assets, this stablecoin is often over-collateralized. That is, the amount of deposit required is usually higher than the value of the DAI.
For instance, users must deposit $200 worth of ETH in order to unlock $100 DAI, offering a sort of volatility buffer. This way, if the price of ETH drops by 25%, that $100 DAI loan would still be safely covered by $150 worth of ETH.
Will DAI’s Value Continue to Fall?
After the Silicon Valley Bank crisis, stablecoins faced a de-pegging problem. The gap between the stabilized value of these stablecoins and their current standing value is shrinking. The price has lost about 14% in the past day and is trading at an average price of $0.91 at the time of writing.
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