How is cyDAI created?

cyDAI is a receipt of a deposit of DAI stablecoin in the Iron Bank protocol on Ethereum and accrues interest. cyDAI is exposed to the systemic risks of the Iron Bank lending protocol as a default in one asset market can have a contagion effect across the entire platform. DAI is the most battle-tested, decentralized stablecoin in DeFi. DAI is a collateral-backed stablecoin created by MakerDAO. Its value is pegged to the USD and kept stable through an economic system of aligned financial incentives. DAI is minted when users borrow against locked collateral and burned when debt is repaid.

What is DAI used for?

DAI is a price-stable asset that is mostly used as a hedge against volatility as it maintains a stable value of around 1 USD. Users need an alternative store of value and medium of exchange to navigate the highly volatile crypto markets. DAI addresses this problem for crypto native users, as well as enables a wide range of financial activities including hedging during periods of high market volatility, market making against a stable asset, use as collateral for leveraging, and payment as a medium of exchange.

How is the price of DAI kept stable?

DAI is an asset-backed currency that maintains a free-floating peg to the USD. This means that its value may differ from exactly 1 USD from time to time given current market conditions. For the most part, DAI has remained one of the most stable decentralized stablecoins to date via a combination of external market forces, internal economic incentives, and policy tools controlled by MKR token holders. The different market actors all acting in self-interest, work in concert to maintain DAI's stability. Stability fees are one policy tool that is used to manage the circulating supply of DAI. Decreasing the stability fee lowers the cost of borrowing, which helps incentivize the minting of additional DAI while increasing the stability fee has the opposite effect of reducing the rate of DAI creation. Arbitragers also contribute to maintaining the DAI peg by taking advantage of price differences across various market makers. Lastly, vault owners also participate in maintaining the peg by minting DAI when spikes in demand push its price above 1 USD, and conversely purchasing DAI to pay down their debt at a discount when it trades below 1 USD.