DAI: price, peg and mechanics.

USDT and USDC are IOUs backed by reserves. DAI is created when someone locks collateral in the Sky protocol (formerly MakerDAO) and destroyed when that loan is repaid. No issuer can freeze it, but the backing consists of volatile assets and the system depends on code and governance.

Borrowers lock more value than they receive — historically 145 to 170 per cent for ether. If collateral falls too far, the position is auctioned automatically. On 12 March 2020 that mechanism failed under extreme volatility, leaving a shortfall that governance later covered; auction parameters have since been tightened.

Two levers steer the price: the stability fee borrowers pay, and the savings rate paid to holders. A peg stability module also allows one-for-one swaps against other stablecoins, which is effective but leaves a large share of the backing in centralised USDC.

Backing has shifted from mostly ether to a mix of crypto collateral, centralised stablecoins and short-dated US Treasuries held through regulated structures. That yield funds the savings rate but reintroduces counterparty risk.

Under MiCA a single-currency stablecoin needs a licensed issuer offering redemption at par, which a protocol cannot provide, so some EU venues restrict DAI trading. Key risks are a sharp collateral drawdown during congestion, contract bugs, governance changes and contagion through the USDC reserve.