The latest edition of The Economist has DeFi as its lead topic. There are a few mentions of MakerDAO, nice description of Dai, and quotes by Rune:
Of all digital activities, it is efforts towards decentralising finance that are most advanced. Far from the self-aggrandising ambition of Wall Street, decentralised finance (DeFi) instead seeks Utopian-sounding crowdsourced control. Applications and functions are run not by a single centralised entity or company, but by user-operated “decentralised autonomous organisations” (daos). “I will be just a regular community member,” says Rune Christensen, the founder of MakerDAO, a DeFi organisation. “In the end, it is mostly about how you contribute, not who you are."
One way of knowing for sure that a stablecoin is fully backed is by keeping the collateral on an open blockchain, which is transparent, and storing it in a smart contract. The problem is that the collateral must be held in an asset native to a blockchain, like bitcoin or ether, which fluctuates wildly. There is, however, a clever workaround. The biggest “on-chain” stablecoin is dai, run by Mr Christensen’s MakerDAO. Anyone can create new dai tokens, as long as they lock up enough collateral, usually ether, in a smart contract.
Because ether is volatile, the protocol requires users to over-collateralise the tokens they create. If the value of a user’s collateral falls below 150% of the value of the outstanding dai, the smart contract automatically auctions off the collateral to cancel the debt in dai. To reclaim collateral the dai must be returned, plus a small variable “stability” fee (paid in dai) which tends to climb with volatility in collateral.
Dai is remarkably stable against the dollar. Only once, when ether dropped sharply in 2020, did the peg break, with dai falling by around 10% in 12 hours. This occurred in part because developers had fixed a maximum stability fee into the protocol. To replenish funds and restore the peg new governance tokens were issued, diluting the current owners. The coding problem was solved over the following months by a consensus of those holding the governance tokens. In 2021, when ether crashed again, dai remained stable. Around $6.5bn in dai currently exists.