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?
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: