It's currently backed by ETH but is moving towards multi-collateral assets. Today, they announced a partnership with Omisego [1], with one goal to allow OMG to be used as a type of collateral. There's also chatter about using DIGIX, which is another stablecoin pegged to the price of gold.
The mechanism by which they maintain stability is quite fascinating. From the whitepaper [2]:
> The Dai Target Price is used to determine the collateral-to-debt ratio of a CDP, and thus the Target Price represents the price at which Dai is backed by collateral in the long term. The Target Price is continuously adjusted according to the current Target Rate. Automatic Target Rate adjustments ensure that the Dai market price remains stabilized around the Target Price in the short term.
> When the market price of Dai is below the Target Price, the Target Rate increases. This causes the Target Price to increase at a higher rate, causing generation of Dai to become more expensive. This leads to CDP users covering their CDPs and leaving the ecosystem, causing the outstanding supply of Dai to decrease. At the same time, the increased Target Rate causes the capital gains from holding Dai to increase, leading to a corresponding increase in Dai demand. This combination of reduced supply and increased demand causes the Dai market price to increase, pushing it up towards the Target Price.
The mechanism by which they maintain stability is quite fascinating. From the whitepaper [2]:
> The Dai Target Price is used to determine the collateral-to-debt ratio of a CDP, and thus the Target Price represents the price at which Dai is backed by collateral in the long term. The Target Price is continuously adjusted according to the current Target Rate. Automatic Target Rate adjustments ensure that the Dai market price remains stabilized around the Target Price in the short term.
> When the market price of Dai is below the Target Price, the Target Rate increases. This causes the Target Price to increase at a higher rate, causing generation of Dai to become more expensive. This leads to CDP users covering their CDPs and leaving the ecosystem, causing the outstanding supply of Dai to decrease. At the same time, the increased Target Rate causes the capital gains from holding Dai to increase, leading to a corresponding increase in Dai demand. This combination of reduced supply and increased demand causes the Dai market price to increase, pushing it up towards the Target Price.
[1] https://medium.com/makerdao/makerdao-and-omisego-announcing-...
[2] https://github.com/makerdao/docs/blob/master/Dai.md#target-p...