Maker uses its Target Rate Feedback Mechanism technology to control the Dai-USD peg (TRFM). When the market is volatile, the Target Rate specifies the price adjustments required for Dai to achieve the Target Price of $1. For instance, if Dai is selling for less than $1, the TRFM will rise, raising the cost of producing Dai through CDPs as a result of the rise in the price of Dai. As a result of this effect, Dai holders make money, which raises the price of Dai. The price of Dai is being forced back up to its Target Price. This as a result of the recently increased demand for Dai.
Exogenous market supply and demand dynamics determine the TRFM and Target Rate. However, MKR voters have the power to control the TRFM’s Sensitivity Parameter. When the Dai price deviates from $1, the Sensitivity Parameter controls how quickly and how much the TRFM should react. This Sensitivity Parameter makes sure there is enough response time to start a global settlement in the case of a network attack (together with the restrictions decided by MKR voters).
Modul for Peg Stability (PSM Technology)
Users depositing collateral to permissionless vaults at an overcollateralized ratio is the main way MakerDAO technology generates DAI. The minting method does not, however, provide complete protection from price fluctuations across DEXs and DeFi. DAI is pegged to USD by MakerDAO via a combination of open market operations (also known as the Price Stability Mechanism) and interest rate control via the Dai Savings Rate, which is currently 0.01 percent.
A Peg Stability Module (PSM) is another feature of the Maker protocol. It enables users to exchange collateral directly for Dai at a fixed rate. As opposed to borrowing Dai. Similar to a typical vault, but with stablecoin collateral, the PSM was created. Users that exchange stablecoins for Dai do not pay a stability charge and have a 100% liquidation ratio. Users of PSM borrow Dai rather than maintaining ownership of the asset, which is not the case with conventional vaults. Instead, they directly exchange Dai for the asset. From the standpoint of the user, the PSM is only a DEX for trading stablecoins at the most advantageous rates.
MakerDAO agrees to exchange one unit of USD for one unit of DAI at a 1:1 ratio through the Price Stability Mechanism technology, allowing arbitrageurs to profit if DAI rises beyond the peg. By weakening the available supply, this computational strategy seeks to tame any excessive demand for DAI. The tactic worked well at controlling the upside of DAI in relation to the peg, while the downside is mostly controlled by over-collateralization.
Conclusion
When Dai demand exceeds Dai supply, the PSM was created to help keep the Dai peg near $1. A PSM and a conventional vault further vary. In that a PSM enables Governance to receive fees on stablecoins. At the time of the swap rather than over time. Another distinction is that the stablecoins that users deposit into the PSM as collateral are distributed throughout a single large liquidity pool, i.e. there are no segregated vaults. The PSM reserves are a part of this pool. In the Maker Protocol, a PSM is essentially just a stablecoin vault type, and all the restrictions that apply to vault types also apply to PSMs.
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