Dai 1.0 seeks to maintain stable value relative to a reference; the US Dollar.
To this end, the system must ensure that the amount of Dai in circulation is at all times backed by at least the equivalent USD amount of collateral.
In order to achieve this:
pip) which is provided by a trusted external oracle.
par), which is pegged at 1 USD for Dai 1.0
mat) is set via governance and enforced by liquidating unsafe borrowing positions when necessary.
The target price is essentially what the system considers to be the USD value of 1 Dai and is the rate at which the value of all debt and collateral is compared.
pip: USD/ETH - external reference price
par: USD/DAI - target price
The system enforces the target price
par by using it to derive the DAI/ETH
ration in all comparisons of debt:collateral.
Normal CDP operations are only possible when their collateral:debt ratio is
mat - the liquidation ratio.
When checking CDP safety, the external reference price
pip is used in order to
establish the USD value of the collateral, whilst the target price
used to price the outsanding debt.
Thus, CDP safety is assessed in USD terms at target price 1 DAI = 1 USD.
By liquidating CDPs that fall below the safe ratio the system can ensure that the USD value of collateral backing circulating dai remains within determined parameters.
When buying and selling Dai via
bust the external reference price
pip is used to value the collateral being exchanged, whilst the target price
par is used to value debt.
Thus the quantity of dai to collateral exchanged is determined in terms of USD where 1 Dai = 1 USD.
The system can be globally settled at any time via governance by an operation
cage. This is roughly equivalent to biting all CDP’s at once,
locking the system, and allowing all circulating dai to be exchanged for
collateral at the cage price.
The system uses the external reference price
pip and the target price
to fix the Dai value of the collateral at the point of cage.
Ultimately, it’s the threat of global settlement which provides the incentive for markets to tend towards the target price of Dai.
The target price
par is provided via an updatable price feed, vox. It is pegged to 1 USD in Dai 1.0 but could
be updated via TRFM in future versions, allowing the target rate to be
automatically adjusted in response to emerging market conditions. The
component is subject to ongoing economic modelling research.