After their recent plunge, digital currency the digital currency Bitcoin has made a recovery attempt. On Tuesday, the currency climbed back above the 7100 U.S. dollar mark after slipping to 6450 U.S. dollars in early trading on Monday. On Friday, the Bitcoin rate slipped below 7000 US dollars for the first time in more than half a year.
The recent sell-off was triggered by increased pressure from the Chinese government to trade crypto currencies. After the digital currency had temporarily risen to almost 14,000 dollars in the summer months, due to a big hype in the media and also things like bitcoin betting, the value of the crypto currency has now more than halved.
Market observers also pointed to technical reasons for the price slide. Accordingly, the price of the digital currency fell below the 200-day line, which technical analysts regard as a strong sell signal. This triggered further selling in the market and accelerated the decline of the Bitcoin.
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The Bitcoin is known for its course capers. The digital currency is generated by complex computer calculations. The basic idea behind Bitcoin, which was launched in 2009 during the financial crisis, is largely anonymous payment transactions that function independently of governments and banks.
Stablecoins to improve image of digital currencies
The extreme price fluctuations of Bitcoin & Co. are an obstacle to the acceptance of crypto currencies as a general means of payment. So-called stablecoins combat this shortcoming by coupling their price to one or more real currencies. The online network, for example, is following this path with its planned Cybderdevise Libra. Some issuers also deposit their digital coins with investments such as gold.
From the point of view of some users, however, both variants have a decisive disadvantage: they remain dependent on institutions such as central banks and commercial banks. The former use monetary policy to control the exchange rates of dollars, euros and the like. The latter hold the deposited assets in safe custody.
Crypto currency Dai to be linked to Ethereum
The creators of the crypto currency Dai want to avoid this dependency by not using a national currency as security, but Ethereum, the world’s second most important cyberdevise after Bitcoin. This has the advantage that once users have bought Etherum for dollars or euros, they can act completely independently of government agencies or banks.
The second major hurdle on the way to a virtual global “popular currency” is the threat of price turbulence. Here the choice of Etherum as security appears to be a contradiction in terms, as its price fluctuates as strongly as that of Bitcoin. Therefore, the Dai exchange rate is based on the dollar, but is not rigidly linked to the US currency. According to their own statements, the Dai makers are striving for a price ratio of 1:1, which they want to achieve through various correction mechanisms.
Security mechanisms against price turbulence
In order to access Dai, users must first deposit Ethereum into a public account called the Collateralized Debt Position (CDP). The Dai makers expect additional price stability from the fact that the payout amount is always below the deposit in order to have a safety buffer against price changes at Ethereum.
If the dai rate deviates more strongly from the dollar, the size of the buffer in the CDP is also automatically adjusted. So if the rate falls, users will have to deposit more Ethereum to get the same amount of Dai. In addition, users do not return to the Ethereum parked in the CDP until they have repaid the Dai deducted there plus a “stability fee”.
All these transactions are stored in the blockchain, says Rune Christensen, head of the Dai provider Maker Foundation. “Anyone can check the books in real time. The blockchain technology forms the basis for all crypto currencies. In the long run, the Maker Foundation, which is currently working on the technology, even wants to make itself superfluous. The goal is to refine the system to such an extent that monitoring is no longer necessary, emphasizes Mariano Conti, head of the Smart Contracts department. Experts refer to programs within the blockchain that trigger payments under certain conditions as Smart Contracts.
A test in the real world
The Oxfam charity is already testing Dai in the South Sea island state of Vanuatu, which is regularly hit by natural disasters. The crypto currency allows victims to be helped more quickly and directly in such cases, says Oxfam employee Sandra Hart. The field trial is to be expanded next year.
Dai is also enjoying growing popularity in crisis-ridden Argentina. According to the Maker Foundation, the number of members in a group chat of Argentinian Dai users in the messaging service Telegram doubled within a few weeks to 450. “My mother and I are investing part of our money in Dai,” reports law student Romina Sejas. Because the national currency Peso loses dramatically in value. “We have to be creative to survive the decisions of politicians.
Risks: Hacker attacks and regulation
However, Timothy Stranex, co-founder of the crypto exchange Luno, warns against risks. Digital coins could be stolen by incorrectly programmed Smart Contracts. The Dai makers want to counter this danger with an “emergency shutdown”. In the event of a hacker attack, users are automatically paid their credit balances.
In addition, it is still unclear how legislators will react to Dai. Facebook is blowing a violent headwind into the face of its Libra project, but the authorities have not yet been able to come to a uniform line with other stablecoins. “The regulators are trying to force these new technologies into existing legal frameworks,” says Phil Angeloff of Clifford Chance, a lawyer specializing in crypto currencies.