I learned recently that the DAI uses some kind of smart contract magic to peg itself to the dollar as a stable coin. How is this not centralized as it involves fiat pairs? And what are some of the downsides to this?

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MakerDAO (the organisation which designed DAI) does use smart contracts (Collateralised Debt Position contracts) to help stablise the value of DAI relative to USD. However, as you say, this still relies on a USD / ETH price oracle which is a somewhat centralised component.

In practice MakerDAO use several independent price feeds and takes an average - the contract which does this (the Medianizer contract) can be found on mainnet at:

  • So the DAI is still centralized as you still need to trust a central party to issue the price fo the usd peg. Unless you can change the centralized oracle, but that would break the functionality it seems. How is this different from just a pegged USD token. Commented Sep 24, 2018 at 21:17
  • I believe that MakerDAO use conventional security around the USD / ETH price feed - i.e. multiple independent price feeds which they then average - to avoid the chances of the price being manipulated. DAI is different as it allows borrowing DAI using collateral (ETH) and that part is trustless. There is no central counterparty holding funds (e.g. like Tether), but you are correct that until the oracle is fully decentralised there is a still a central component.
    – Adam Dossa
    Commented Sep 25, 2018 at 8:24

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