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Since the launch of Pulsechain in 2023, the chain has been operating without a stablecoin for months. The Coast team, with their dollar-backed CST token, has only recently achieved this goal. Dai, not backed by dollars but still trading at a 1:1 ratio, is the best-performing stablecoin. The issue is that Pulsechain Dai is not pegged, and it’s more of a meme than a stablecoin right now. Richard Heart has mentioned Dai a few times, and while some argue it’s futile, efforts to continue pegging it are underway. Let’s see what the current situation is and if it’s possible to raise the peg to $1.
Why do we need a stablecoin
A stablecoin is a currency that trades at a stable value and reduces volatility. It can be pegged to a fiat currency like the dollar, gold, other cryptocurrency, or real estate. The goal is to minimize volatility to protect asset value. For example, it’s common for traders to escape to stablecoins when the market turns bearish, but when the stablecoin has no peg, like Pulsechain Dai, there’s nothing to stop its price from sinking together with the market offering no store of value. A stablecoin is necessary for making payments for goods and services. If a service is paid for in a volatile asset, then it can lose value in a matter of minutes. That’s why a stablecoin is indispensable for wider adoption.
What is Dai
Most stablecoins are centralized, and their value is stabilized by central authorities or a consortium. This is true for USDC or USDT, and they don’t provide the trustless solution necessary for a truly decentralized environment. They’re a single point of failure. Dai, on the other hand, is a crypto-backed stablecoin that is overcollateralized and maintains a peg to the US dollar. It’s an open-source project where Dai token creation or pegging doesn’t depend on any central authority but is operated by a series of autonomous smart contracts. It was created in 2017 by MakerDAO and continues to operate flawlessly to this day. Here we describe how Dai works to provide a background for understanding if a Pulsechain Dai peg can ever happen.
How does Dai work?
Dai is a decentralized token of the MakerDAO protocol created every time a user borrows, locking a collateral of accepted assets, and it destroys Dai each time the loan is repaid together with the stability fee. Target Rate Feedback Mechanism (TRFM) is used to maintain the peg at $1 but if this price falls below $1, then TRMF increases, and when it’s pegged back, Dai holders profit and the demand grows. Demand grows because there’s a higher TRMF incentive, which induces users to buy Dai or borrow it through Collateralized Debt Position (CDPs) and to decrease its supply. This causes Dai’s price to regain its peg.
Collateral Value and Forced Liquidation in MakerDAO
The dollar value of locked collateral inevitably undergoes shifts over time. As collateral values oscillate, borrowers find themselves presented with a few choices. When collateral value surges, borrowers gain the capacity to mint new DAI up to the predetermined safe ratio. Conversely, when the dollar value of collateral diminishes, borrowers face the decision of either repaying borrowed DAI or augmenting their collateral deposits, thereby safeguarding their positions as they near the liquidation ratio threshold. However, borrowers who allow their positions to dip below the safe ratio risk encounter forced liquidation.
Forced liquidation is Maker’s proactive strategy to maintain the integrity of the collateral backing the circulating DAI within secure parameters. Positions that descend beneath the liquidation ratio threshold face the potential of having their underlying collateral assets seized and auctioned off on the Maker debt market in exchange for DAI, consequently retracting DAI from circulation. In instances marked by extreme volatility, where the value of the seized collateral may prove inadequate to cover the outstanding debt, the supply of collateral wrapper tokens is expanded to bridge any deficit.
In practice, Dai works like this:
An individual deposits 1 ETH (valued at $3148) into a CDP and borrows 3129 Dai. In this case, the borrower is solely responsible for repaying the 3129 Dai plus accrued interest while retaining their entire 1 ETH deposit. Dai could be used for providing liquidity or buying other tokens, and when the deadline to repay the loan comes, the user still needs to repay 3129 Dai, while the ETH value could now be 30% more. So the user may potentially have gains from fees for providing liquidity or gains from trading activities and the increased value of ETH. It’s also true that this can work in reverse.
Dai on Pulsechain
Dai on Pulsechain is not a newly created token; it’s a fork of Ethereum DAI, which means that the supply at launch was already created but not the $1 value. The dollar value remained on Ethereum, but on Pulsechain, it needs to be established. This process is called pegging, and some think it’s impossible. This is because everyone who holds DAI on Ethereum has free DAI on Pulsechain and is able to dump it on the market, lowering the price. Also, everyone else who bought very cheap Dai at prices as low as $0.000037 per token instead of a normal price of $1 is able to sell it at any major price rise, preventing the token from regaining the peg.
The current supply of Dai is 22 billion, with $1 million in liquidity, $773k in daily volume, and a price of $0.00524. To regain the peg of $1, each 1 Dai token must be backed by the equivalent amount of crypto assets, so more or less 22 billion worth of it. This seems pretty much unfeasible; however, if you think that, according to Richard Heart, each 2x increase in liquidity causes a 4x increase in price, things look differently. That would mean that with the current $1 million in Dai liquidity, an increase to ~$12 million in liquidity would give us $1 for each Dai. If it is true that this is how things work, then this kind of liquidity doesn’t seem impossible to achieve.
Proponents of Dai pegging strongly support the ATROPA ecosystem. ATROPA is a token that is used to create locked LPs in the sense that the LP tokens are sent to the burn address. The rewards generated from providing liquidity remain in the pool. The inability to withdraw the tokens from the pool raises the floor, which is nothing else than the minimum value of Dai in ATROPA, which can be expected at any point. This floor price doesn’t mean that there’s no oscillation in fiat terms, but merely that even if all ATROPA is sold inside the LP, the value of each ATROPA will be worth more DAI than it would normally be and won’t be lower than that. The more such pools with locked liquidity there are, the higher the floor for Dai, which increases its scarcity.
Automated Market Maker bots performing arbitrage transactions between these pools contribute to the pegging, although it’s a very lengthy process that may require a few years.
Increased demand for Dai would definitely accelerate the pegging process. Right now, Dai is just like any other memecoin, with a lower price than HOA or BEAR, but nothing stops it from behaving like a memecoin and making exponential growth with the right narrative. There’s nothing stopping anyone from selling their free Dai copies and making huge profits on the way up; however, with the floor price rising and liquidity increasing, the impact on the price of each sale will always be lower.
There’s a narrative push saying that Richard Heart is in control of the largest holding of Dai and is trying to leverage and trade Pulsechain stablecoins, including Dai. There’s no 100% evidence the wallets in question are his; however, there are some big moves happening on Balancer and Curve.
Conclusion
Saying that Pulsechain Dai will gain the $1 peg is a risk. No one knows if it’s possible. Others think it’s craziness. Creating a new MakerDAO protocol may be a simpler way to play it. Richard Heart, or someone well-versed in high finance and these protocols, may understand the rationale behind the use of the old protocol and duplicated tokens. For everyone else, it remains a matter of speculation and a hope that they will one day become Dai millionaires.
