It’s a little like the DAI credit system where you lock collateral and give yourself a loan in any asset available on the platform.
So let’s say you need ZRX for an app you’re buidling, you lock DAI and borrow ZRX against it, with minimal collateralization of 150%.
It is impossible to convert 1 DAI for $1 of underlying collateral.
The value of DAI relies on [sunk cost falacies](https://youarenotsosmart.com/2011/03/25/the-sunk-cost-fallacy/) (people will buy dai if the price falls below what they sold it for) and [anchoring](https://www.investopedia.com/terms/a/anchoring.asp) (constant repetition that 1 dai = $1).
Global settlement is the **only** temporary stability mechanism that Dai has. To be effective it has to be predictable and a **regular** occurance. The less frequently it occurs, the more volatile the stablecoin, the longer and larger divergence from $1.
When Global settlement occurs DAI looses it's stable property as it is directly linked to a quantity of the underlying collateral.
A far too slow/crude a mechanism for fine control of prices.
Provides an additional incentive for dai creators to sell for as high a price as possible (i.e. not $1)
Also, the interest rate mechanism doesn't currently exist.
Its proved to be relatively stable with the slow manual mechanism and the fast automatic mechanism is being released soon. They're saying later this year but I anticipate next
EDIT: To add on, they've delivered on all their promises until now so its reasonable to expect they will continue to do so
>Its proved to be relatively stable
Meh. It has been 1.02 for the past week after a spike of 1.10 in korea. As there is no economic reason for 1 dai = $1 the main reason for current "stability" are MakerDao's market making bots (which probably aren't active in korea).
>with the slow manual mechanism
You mean the stability fee? Given that this doesn't move then it can't be claimed to have any control.
>they've delivered on all their promises
They've promised dai volume in the billions. At those scales their bots will bankrupt faster than you can say [Black Wednesday](https://en.m.wikipedia.org/wiki/Black_Wednesday).
For the interest rate adjustment to provide stability it has to be continually activated and deactivated when DAI is above or below $1. Seeing as it isn't it can't be claimed to cause stability.
The problems Dai faces now (highlighted previously) are going to be exacerbated if Dai hits 1bn. Bots will not save Dai stability. Neither will interest rates. Their only option will be to switch and "target" a nebulous, rarely updated statistic, such as inflation and abandon all links to USD.
**Dai is not a USD stablecoin**
Interest rates are only crude mechanisms in traditional fx markets. They cannot be used for fine control of prices. All existing pegged currencies are controlled and backed by funds of large central banks that enter the market. Not by interest rates.
Also dai creators will form cartels for mutal benefit to manipulate the automatic interest rate to their advantage.