BakerDAO Explanation I: A Decentralized Stablecoin - BAI (July 15, 2021)

Monday, July 15, 2021

1.What is BAI? ‌

BAI is a stablecoin fully secured with assets, and its value is guaranteed to remain stable at 1:1 with the US dollar through a series of financial incentives. ‌

Entirely based on the blockchain, BAI's stability is not affected by geography, and its solvency is not dependent on any counterparty that needs to be trusted. All the BAIs in circulation are backed by excess collateral, which is hosted in auditable and publicly viewable Ethereum smart contracts. ‌

Once generated, a BAI can be used like any other cryptocurrency: it can be freely sent to others, used to purchase goods or services, or held as a tool to hedge against market volatility. ‌

2. Why should I use BAI? ‌

As a unit of account with predictable price and low volatility, BAI can be applied to a variety of financial activities that cannot be carried out due to market speculation and instability. ‌

The decentralized digital economy requires stability to function. The stablecoin BAI solves this problem from the ground up, making it suitable for a wide range of financial markets. ‌

Hedging: BAI provides investors with a safe haven to store value in times of high market volatility, so that investors may stay in the cryptocurrency market. Hedge funds and foundations that hold a large number of encrypted assets, and projects that have just completed financing, may convert their assets into BAI, a currency that is not subject to volatility. ‌

Decentralized Exchanges: Decentralized exchanges usually do not support trading of fiat and cryptocurrencies, while digital asset holders can exchange their other digital assets for BAIs, which are anchored to the US dollar and have low price volatility. ‌

Trading pair: Currency trading is a complicated process. When users are trading, the rises or falls of the underlying trading pairs may exacerbate the difficulty of tracking earnings. When low-volatility trading pairs with BAI are introduced, users have a stable pricing currency that can improve trading efficiency. ‌

Financial market: BAI can be used as stable and reliable collateral for various derivative smart contracts, or a margin for leverage. ‌

Commercial invoices, cross-border transactions and remittances: By eliminating foreign exchange fluctuations and third-party involvement, BAI can significantly reduce cross-border transaction costs. ‌

Market prediction and gambling: Long-term betting also becomes unfeasible if users cannot predict the value that their betting assets can reach in the future. A stable currency such as BAI can be a natural choice for predicting the market. ‌

3. Is 1 BAI always worth 1 U.S. dollar?

‌

No. BAI is not hard anchored. Therefore, it may not be fully aligned with the value of existing fiat. Of course, when compared with other cryptocurrencies, BAI maintains a soft peg exchange rate with low volatility. It is worth noting that in case of emergency liquidation, BAI can be used to redeem collateral with a value exactly equal to USD 1 based on the price of the oracle machine at the time of emergency liquidation.

‌4.How are BAIs generated?

‌All BAIs are generated by collateralizing digital assets on the chain.

‌Suppose you have some crypto and digital assets, such as Ethereum. You need a sum of liquid cash, but you don't want to sell Ethereum. Then you can collateralize Ethereum to generate BAIs, and use the BAIs as liquid capital while retaining the income rights of Ethereum.

‌When a Vault owner locks the collateral to borrow BAIs, new BAIs are generated. Vault holders who want their collateral back must buy BAIs on the open market and return them to the Vault. This action is equivalent to burning the BAIs. This generation and burning mechanism ensures that all circulating BAIs are backed by sufficient collateral.

‌For example,

• ‌You lock USD 150 of Ethereum into the Vault smart contract as collateral.

• According to the risk parameter of the collateral (2/3 discount), 100 BAIs can be generated, which is equal to USD 100.

• The BAIs can be exchanged for USD or invested in other assets.

• When you need to retrieve the collateralized Ethereum, the 100 BAIs and interest are repaid, the Ethereum is retrieved and the proceeds (from the rise of Ethereum or from the investment with the BAI) are retained.

A system of autonomous smart contracts specifically designed to respond to market pressures maintains the fundamental stability of the assets. No one can modify the core mechanics of BAI, so that it is a reliable and predictable form of currency.

‌It is worth noting that average BAI users do not need to understand the detailed mechanism of the system, but only need to check the information on the open market to buy or sell BAI at USD1.

‌5.Who else controls BAI besides me?

None. You have absolute control. ‌

BAI is a BEP-20 token with a completely homogeneous value, and can be kept in any standard BSC wallet. It can be exchanged freely without involving complex advanced features. ‌

BAI is owned by its holder only and is not controlled by any third party. ‌

6.How is the price of BAI kept stable? ‌

As BAI is not hard anchored, it does not need to be aligned with the value of the current fiat. On the contrary, it maintains a free soft peg mechanism, and is less volatile than other cryptocurrencies. ‌

External market forces, complementary internal economic incentives and policy instruments combine to realize this stability. Many different market participants act for their own interests while working in a coordinated manner, contributing to market stability. These participants include BKR holders, arbitrageurs, Vault owners, and general market makers. ‌

If the demand for BAI continues to exceed the supply, this is a signal indicating that BKR holders need to adjust the stability fee, and vice versa. The increase in stability fee has led to increased borrowing cost for Vault users, the attractiveness of using Vault is reduced, and therefore the supply of BAI is inhibited. Conversely, the reduction of stability fee (borrowing cost) will stimulate additional BAI generation as a policy tool to adjust supply growth. ‌

Arbitrageurs also contribute to the short-term anchoring of BAI by taking advantage of various opportunities in the BAI market. ‌

When demand stimulus raises the price of BAI higher than its exchange value, Vault holders can take the chance to play a role in maintaining exchange rate stability. This allows Vault users to issue BAIs in exchange for assets with additional variable purchasing power. Conversely, when the price of a BAI falls below USD1, Vault users may sell their BAIs at a cheaper price to repay their Vault debt at a variable discount. ‌

Finally, third-party network participants, known as Keepers, help stabilize the price of BAI. A Keeper is a human being or an automated program that helps keep BAI anchored by taking advantage of arbitrage opportunities.

‌ 7.How can I issue BAIs? ‌

All BAIs are borrowed from the Vault. ‌

8. Where can I buy BAIs? ‌

You can buy BAIs in the decentralized exchange Pancakswap. Go to the exchange: https://pancakeswap.finance/swap