Hi Paul, thanks for the response.

Let’s first begin with the normal workings of the system and why the peg is naturally maintained:
- Dai can always be created at $1 through the CDP system. So if I see Dai trading for $1.05 on an exchange, I can simply deposit some collateral into a CDP, borrow Dai against it at a rate of $1, and sell it on the exchange for $1.05.
- If Dai was to trade at a discount, current CDP holders would purchase it in order to repay their loans and re-claim their collateral. As an example, imagine Dai trading at $0.95 on an exchange. You, as a CDP holder with debts denominated in Dai would want to purchase Dai for $0.95 to repay your loan at a 5% discount.

Now, should the system have a fundamental difference in supply and demand, the Target Rate Feedback Mechanism would most likely be activated. You can read more about that here in the whitepaper (https://makerdao.com/whitepaper/DaiDec17WP.pdf#page=6), but to summarize “ The TRFM is the automatic mechanism by which the Dai Stablecoin System adjusts the Target Rate in order to cause market forces to maintain stability of the Dai market price around the Target Price.”

Finally, should all else fail, there is Global Settlement. This is when the system stops allowing users to open new CDPs and let’s holders exchange Dai 1:1 for $1 in collateral at a fixed point in time. It should be noted that even the threat of this should keep bad actors from trying to break the system.

Hope that answers your questions!