While DAI is a stablecoin, it’s much different than, for instance, Tether. Most stablecoins are fully backed by cash reserves and their equivalents, like government-issued bonds. DAI is backed by assets approved by its DAO, which include, but are not limited to, Ether, Basic Attention Token, or USD Coin.

To maintain a target price of $1 by being over-collateralized, meaning the value of assets that are in the treasury is more valuable than DAI issued. Dai automatically adjusts its interest rates depending on market conditions to regulate the supply of DAI available on the market. 

It’s worth noting that once the value of the collateral in a vault falls below the required threshold, the position is automatically liquidated to cover the created debt.

In short, Dai is a combination of traditional stablecoins combined with some elements of algorithmic stablecoins. The entire DAO and all DAI systems act like a national bank, adjusting key components accordingly.