pThe Dai Stablecoin System Whitepaper https// By the Maker Team December 2017 nbsp;Overview of the Dai Stablecoin System 3 Collateralized Debt Position Smart Contracts 3 The CDP interaction process 4 Single-Collateral Dai vs Multi-Collateral Dai 4 Pooled Ether Temporary mechanism for Single-Collateral Dai 5 Price Stability Mechanisms 5 Target Price 5 Target Rate Feedback Mechanism 6 Sensitivity Parameter 7 Global Settlement 7 Global Settlement Step by Step 7 Risk Management of The Maker Plat 8 Risk Parameters 9 MKR Token Governance 10 MKR and Multi-Collateral Dai 11 Automatic Liquidations of Risky CDPs 11 Liquidity Providing Contract Temporary mechanism for Single-Collateral Dai 12 Debt and Collateral Auctions Multi-Collateral Dai 12 Key External Actors 13 Keepers 13 Oracles 14 Global Settlers 14 Examples 14 Addressable Market 16 Risks and their Mitigation 17 Malicious hacking attack against the smart contract infrastructure 17 Black swan event in one or more collateral assets 18 Competition and the importance of ease-of-use 18 Pricing errors, irrationality and unforeseen events 18 Failure of centralized infrastructure 19 Conclusion 19 Glossary of Terms 20 Links 21 nbsp;Overview of the Dai Stablecoin System Popular digital assets such as Bitcoin BTC and Ether ETH are too volatile to be used as everyday currency. The value of a bitcoin often experiences large fluctuations, rising or falling by as much as 25 in a single day and occasionally rising over 300 in a month. . nbsp;1The Dai Stablecoin is a collateral-backed cryptocurrency whose value is stable relative to the US Dollar. We believe that stable digital assets like Dai Stablecoin are essential to realizing the full potential of blockchain technology. nbsp;Maker is a smart contract plat on Ethereum that backs and stabilizes the value of Dai through a dynamic system of Collateralized Debt Positions CDPs, autonomous feedback mechanisms, and appropriately incentivized external actors. Maker enables anyone to leverage their Ethereum assets to generate Dai on the Maker Plat. Once generated, Dai can be used in the same manner as any other cryptocurrency it can be freely sent to others, used as payments for goods and services, or held as long term savings. Importantly, the generation of Dai also creates the components needed for a robust decentralized margin trading plat. nbsp;Collateralized Debt Position Smart Contracts Anyone who has collateral assets can leverage them to generate Dai on the Maker Plat through Maker’s unique smart contracts known as Collateralized Debt Positions. nbsp; 2CDPs hold collateral assets deposited by a user and permit this user to generate Dai, but generating also accrues debt. This debt effectively locks the deposited collateral assets inside the CDP until it is later covered by paying back an equivalent amount of Dai, at which point the owner can again withdraw their collateral . Active CDPs are always collateralized in excess, meaning that the value of the collateral is higher than the value of the debt. 1 nbsp;David Ernst Hard Problems in Cryptocurrency 2 https// nbsp;The CDP interaction process ● Step 1 Creating the CDP and depositing collateral The CDP user first sends a transaction to Maker to create the CDP, and then sends another transaction to fund it with the amount and type of collateral that will be used to generate Dai. At this point the CDP is considered collateralized. ● Step 2 Generating Dai from the collateralized CDP nbsp;The CDP user then sends a transaction to retrieve the amount of Dai they want from the CDP, and in return the CDP accrues an equivalent amount of debt, locking them out of access to the collateral until the outstanding debt is paid. nbsp;● Step 3 Paying down the debt and Stability Fee nbsp;When the user wants to retrieve their collateral, they have to pay down the debt in the CDP, plus the Stability fee that continuously accrue on the debt over time. The Stability Fee can only be paid in MKR. Once the user sends the requisite Dai and MKR to the CDP, paying down the debt and Stability Fee, the CDP becomes debt free. nbsp;● Step 4 Withdrawing collateral and closing the CDP nbsp;With the Debt and Stability Fee paid down, the CDP user can freely retrieve all or some of their collateral back to their wallet by sending a transaction to Maker. Single-Collateral Dai vs Multi-Collateral Dai Dai will initially launch with support for only one type of collateral, Pooled Ether. In the next 6-12 months we plan to upgrade Single-Collateral Dai to Multi-Collateral Dai. The primary difference is that it will support any number of CDP types. nbsp;33 nbsp;Mechanics that are temporarily in place in the system during the Single-Collateral phase are marked in this white paper nbsp;Pooled Ether Temporary mechanism for Single-Collateral Dai At first, Pooled Ether PETH will be the only collateral type accepted on Maker. Users who wish to open a CDP and generate Dai during the first phase of the Maker Plat need to first obtain PETH. This is done instantly and easily on the blockchain by depositing ETH into a special smart contract that pools the ETH from all users, and gives them corresponding PETH in return. nbsp;If there is a sudden market crash in ETH, and a CDP ends up containing more debt than the value of its collateral, the Maker Plat automatically dilutes the PETH to recapitalize the system. This means that the proportional claim of each PETH goes down. nbsp;After the Maker Plat is upgraded to support multiple collateral types, PETH will be removed and replaced by ETH alongside the other new collateral types. Price Stability Mechanisms Target Price The Dai Target Price has two primary functions on the Maker Plat 1 It is used to calculate the collateral-to-debt ratio of a CDP, and 2 It is used to determine the value of collateral assets Dai holders receive in the case of a global settlement. nbsp;The Target Price is initially denominated in USD and starts at 1, translating to a 11 USD soft peg. nbsp;Target Rate Feedback Mechanism In the event of severe market instability, the Target Rate Feedback Mechanism TRFM can be engaged. Engaging the TRFM breaks the fixed peg of Dai, but maintains the same denomination. nbsp;The TRFM is the automatic mechanism by which the Dai Stablecoin System adjusts the Target Rate in order to cause market forces to maintain stability of the Dai market price around the Target Price. The Target Rate determines the change of the Target Price over time, so it can act either as an incentive to hold Dai if the Target Rate is positive or an incentive to borrow Dai If the Target Rate is negative. When the TRFM is not engaged the target rate is fixed at 0, so the target price doesn’t change over time and Dai is pegged. When the TRFM is engaged, both the Target Rate and the Target Price change dynamically to balance the supply and demand of Dai by automatically adjusting user incentives for generating and holding Dai. The feedback mechanism pushes the market price of Dai towards the variable Target Price, dampening its volatility and providing real-time liquidity during demand shocks. With the TRFM engaged, when the market price of Dai is below the Target Price, the Target Rate increases. This causes the Target Price to increase at a higher rate, causing generation of Dai with CDPs to become more expensive. At the same time, the increased Target Rate causes the capital gains from holding Dai to increase, leading to a corresponding increase in demand for Dai. This combination of reduced supply and increased demand causes the Dai market price to increase, pushing it back up towards the Target Price. The same mechanism works in reverse if the Dai market price is higher than the Target Price the Target Rate decreases, leading to an increased demand for generating Dai and a decreased demand for holding it. This causes the Dai market price to decrease, pushing it down towards the Target Price. This mechanism is a negative feedback loop Deviation away from the Target Price in one direction increases the force in the opposite direction. Sensitivity Parameter The TRFM’s Sensitivity Parameter is a parameter that determines the magnitude of Target Rate change in response to Dai target/market price deviation. This tunes the rate of feedback to the scale of the system. MKR voters can set the Sensitivity Parameter but when nbsp;the TRFM is engaged the Target Price and the Target Rate are determined by market dynamics, and not directly controlled by MKR voters. nbsp;The Sensitivity Parameter is also what is used to engage or disengage the TRFM. If the Sensitivity Parameter and the Target Rate are both zero, Dai is pegged to the current Target Price. Global Settlement Global settlement is a process that can be used as a last resort to cryptographically guarantee the Target Price to holders of Dai. It shuts down and gracefully unwinds the Maker Plat while ensuring that all users, both Dai holders and CDP users, receive the net value of assets they are entitled to. The process is fully decentralized, and MKR voters govern access to it to ensure that it is only used in case of serious emergencies. Examples of serious emergencies are long term market irrationality, hacking or security breaches, and system upgrades. Global Settlement Step by Step ● Step 1 Global Settlement is activated If enough actors who have been designated as global settlers by Maker Governance believe that the system is subject to a serious attack, or if a global settlement is scheduled as part of a technical upgrade, they can active the Global Settlement function. This stops CDP creation and manipulation, and freezes the Price Feed at a fixed value that is then used to process proportional claims for all users. ● Step 2 Global Settlement claims are processed After Global Settlement has been activated, a period of time is needed to allow keepers to process the proportional claims of all Dai and CDP holders based on the fixed feed value. After this processing is done, all Dai holders and CDP holders will be able to claim a fixed amount of ETH with their Dai and CDPs. nbsp;● Step 3 Dai and CDP holders claim the collateral with their Dai and CDPs Each Dai and CDP holder can call a claim function on the Maker Plat to exchange their Dai and CDPs directly for a fixed amount of ETH that corresponds to the calculated value of their assets, based on the target price of Dai. E.g. If the Dai Target Price is 1 U.S. Dollar, The ETH/USD Price is 200 and a user holds 1000 Dai when Global Settlement is activated, after the processing period they will be able to claim exactly 5 ETH from the Maker Plat. There is no time limit for when the final claim can be made. Risk Management of The Maker Plat The MKR token allows holders to vote to per the following Risk Management actions ● Add new CDP type Create a new CDP type with a unique set of Risk Parameters. A CDP type can either be a new type of collateral, or a new set of Risk Parameters for an existing collateral type. ● Modify existing CDP types Change the Risk Parameters of one or more existing CDP types that were already added ● Modify Sensitivity Parameter Change the sensitivity of the Target Rate Feedback Mechanism ● Modify Target Rate Governance can change the Target Rate. In practice modifying the Target Rate will only be done in one specific circumstance When MKR voters want to peg the price of Dai to its current Target Price. It will always be done in conjunction with modifyin/p