I understand that a DAI position has to be collateralized by at least 150% with the underlying asset such as ETH.
So, for our example’s sake, let’s say the current ETH price is at $150 which entitles a borrower up to 100 DAI tokens. So far, 100 DAI tokens are backed by 1 ETH.
If the market price of ETH drops below $150, what exactly is happening, step by step?
Do bidders bid on the entire collateral amount in DAI and then those DAI tokens are burned? Is that the right idea, that as collateral prices dip, there is not enough value to back outstanding DAI so the DAI token supply has to decrease?
I’m sure there’s a lot more to this so I’m happy to discuss.