DAI is a stable coin cryptocurrency which aims to keep its value as close to one United States dollar (USD) as possible through an automated system of smart contracts on the Ethereum blockchain.
How is DAI COIN used?
Users who deposit Ether (or other cryptocurrencies accepted as collateral) are able to borrow against the value of their deposits and receive newly generated Dai. The collateralization ratio for Ether is currently set at 150%, or in other words, depositing $150 worth of Ether allows one to borrow up to 100 Dai (roughly equivalent to $100). If the value of the collateral declines below this ratio, the loan can be automatically liquidated by the smart contracts. On the other hand, if its value increases, additional Dai can be borrowed.
Consequently by repaying a loan and its accrued interest, the returned Dai is automatically destroyed and the collateral is made available for withdrawal. In this way the USD value of Dai can be said to be backed by the USD value of the underlying collateral held by MakerDAO's smart contracts. By controlling the types of accepted collateral, collateralization ratios, and the interest rates for borrowing or storing Dai, MakerDAO is able to control the amount of Dai in circulation, and thus its value.
The power to propose and implement changes to such variables is granted, through code, to holders of the MKR token. Owners of the governance token are able to vote on proposed modifications in equal proportion to the amount of tokens they hold. The MKR token also serves as an investment in the Maker DAO system. Added interest that borrowers pay back, on top of their loan's principal, is used to buy up MKR tokens from the market and burn them (i.e. destroy, permanently take out of circulation). This mechanism aims to make MKR deflationary in correlation to the revenues from lending Dai.