As we have seen it before, xDai is more than a simple blockchain using its own stable native cryptocurrency. In this article, we are going to review how this complex ecosystem works and what makes xDai a stable blockchain by definition.
xDai blockchain functionning
Technically, xDai chain is an Ethereum virtual machine layer 2 sidechain where xDai is the native (stablecoin) cryptocurrency.
However, it is important to distinguish xDai from other stablecoins. Indeed, its stable properties don’t come from the direct pegging to FIAT currencies but from the 1:1 Ethereum bridge pegged to Dai ERC20 Token.
Since xDai operates on a side chain, transaction fees are low and the currency is used for both transacting value and paying fees. Which simplifies greatly the standard process used by Ethereum and Dai on the mainnet where gas is required to transfer anything.
This efficient system allows a wide range of peer-to-peer use cases. Since one of the major challenges of cryptocurrency adoption lies in solving the volatility issues for daily use.
xDai currency emission
After reviewing how the side chain works, we need to understand how xDai is generated:
– Dai is locked into an Ethereum smart contract and will remain so until a verified signal is sent to unlock it.
– A bridge mechanism, TokenBridge, transmits the Ethereum smart contract data to another smart contract on the xDai chain.
– The contract generates the exact same amount of xDai on the xDai chain.
– xDai is ready to be used on the xDai chain. Switch the chain your wallet is pointing to and xDai can be used with the same Ethereum address.
If you want to exchange some xDai for Dai, the process will be repeated reversely. xDai will be destroyed in the xDai chain smart contract and a verified signal will be sent (through TokenBridge) to unlock the same amount of Dai on the Ethereum chain. Unlocked Dai are returned to your wallet on the mainnet.
For every respectable decentralized network, validators are required. An incentive is needed to make it viable in the long run. This is why transaction fees are rewarded to xDai validators for securing the blockchain. To make sure this business model can thrive, a new consensus model, called POSDAO (delegated proof of stake mechanism), is about to be adopted. A first of its kind among Ethereum ecosystem.
xDai will enter a new era and become permissionless. POSDAO validators will be rewarded for providing tokens as stake. This is where delegators enter the “game“ and participate by placing stake on potential validators.
They will offer leverage to candidates/validators they think will be good validators. If the candidates are selected, rewards are divided among validators and delegators.
xDai ecosystem run as the first stable blockchain in the industry and cannot be compared to any other project on the market. All those unique features make it competing in a league of its own where past problems have been turned into viable solutions.
xDai being a sidechain running alongside Ethereum, will require the success of the latter for the former to be sustainable. Only future will tell how far it goes but as of now, a couple prominent figures in the industry (MakerDAO, POA Network, Giveth…) have already decided to trust this promising innovative technology.
The following weeks are going to showcase a lot of that so if you want to stay updated you can learn more about xDai on their website and stay updated with their progress by subscribing to their Twitter account.