MakerDAO is basically a community run central bank on the Ethereum blockchain. You can lock away assets you own (currently only ETH but eventually even your house will work as a collateral). By locking away your collateral you can withdraw DAI which will be generated based on your collateral. This is comparable to how banks worked in the past where they only printed money for which they had gold as collateral.

You need to at least have a collateralization of 150 %. If you fall below that, your collateral will be seized, the same amount of DAI that you own will be bought from the market and burned. The rest of your collateral minus 13 % liquidation fee will be send back to you.

At any time you can pay back your loan in DAI or add more collateral.

This mechanism keeps DAI stable at 1 USD.

The entire mechanism runs entirely on the Ethereum blockchain.

Know why is that cool?

1. You have a 100 % decentralized token that you can keep in any crypto wallet that supports ERC-20 token (Be your own bank)

2. You have a token that isn't volatile so it is safe to pay out salaries or buy groceries with it.

Stablecoins that are pegged to Fiat money like the USD still have one centralized aspect though. The currency that they are pegged to is still controlled by centralized organs (e.g FED, European Central Bank etc).

The cool thing is, this stuff is just getting started. MakerDAO is just a few month old and pegging to the USD is really just the beginning of a new era.

In the long term, imagine you have a stablecoin that is pegged to the purchasing power of North America or Europe or any other region of the world.

It's totally possible. The data feeds are the hardest part but there are solutions for that.

Imagine having a currency that is pegged to the purchasing power of your region without any governmental control. This is where we are heading.