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Dai stablecoin: difference from USDT and USDC

Stablecoins are the talk of the crypto world and have been for ages. They are immensely practical, useful, and never really lose relevance. They are a beacon of stability in this otherwise unregulated and unpredictable world. All of that is because they have a stable price and transparent policies.

Dai is the third-biggest stablecoin on the market, behind Tether and USD Coin. It’s often regarded as this third part of the triumvirate, but it’s far behind the other two. It’s $5 billion in market cap against $83 billion and $26 billion of the other two, respectively. Nonetheless, it’s still big and different in a few ways you might see useful.

Creation of Dai

Dai was created in 2017, which actually makes it the second stablecoin in history, after Tether. USDC was only launched a year later, despite the fact that it’s now much more popular and valued than Dai. This popularity is the big difference between USDC and Dai, which are otherwise very similar.

Dai wasn’t just created as another stablecoin. It’s different from Tether, its predecessor, in the way it’s collateralized. In short, which we’ll elaborate on later, it’s not backed by USD. Despite that, it remains pegged to USD, always traded at a rate of 1:1 to it. So, it is also a technological experiment.

But how does it work?

Dai explained

Dai was launched on Ethereum because it was a logical thing to do. While Tether was already big on the Bitcoin blockchain, Ethereum wasn’t claimed by any stablecoin. What’s more, it’s arguably better in many aspects. So, Dai was from the start conceived as a stablecoin for smart contracts.

The problem is that USDC later entered the same market and became a much more popular version of Dai despite offering identical functionality—at least at first glance.

It is different, however. This difference directly determined the fate of this cryptocurrency. There are several main distinctions in the mechanisms of this coin:

  • Dai is collateralized not by physical USD stored in some bank account, like USDC and USDT. It’s backed by collateral assets at the MakerDAO, the system behind Dai. To ‘mint’ a new Dai token, you collateralize a certain number of cryptocurrencies, like Ethereum, BAT, or Wrapped BTC.
  • The value of this collateral portfolio is always kept at the current value of the US dollar. Each minted Dai token is backed by one of these portfolios, which can be comprised of various cryptocurrencies.
  • Any individual can create a new Dai by providing MakerDAO with a certain sum of cryptocurrencies. This has several outstanding advantages, even if it doesn’t really give you any profit, just converts your volatile crypto into non-volatile crypto.

This collateralization, as well as the minting process and the way Dai even operates, is pretty complex. Compared to USDC, which is as it is well known backed by USD, the Dai’s background is not as crystal clear. This is partially what contributed to its lower demand.

Advantages of Dai

Dai offers the same advantages that other stablecoins offer, but with a twist that it is created using a unique collateralization process. So, these advantages are:

  • Stable price, thanks to being pegged to the value of USD. This non-volatility allows you to pursue many interests on the blockchain without fearing that your savings will lose value over some stunt in the market.
  • You can mint Dai, which means an opportunity to convert your own volatile money into stable money. This process is, in fact, very advantageous.
  • Dai is accepted in a variety of online establishments in the decentralized web to largely the same degree as USDT and USDC.

There’s a lot to gain from owning a stablecoin like Dai. The fact that you can actually make your own with some spare crypto is extremely beneficial. Since it never changes in value, you can use it for governance, running contracts, supporting your decentralized finance project, and even just to pay for goods and services.

Disadvantages of Dai

The big question is ‘How is Dai worse than more popular stablecoins?’. There must be something less comfortable about it. Otherwise, people wouldn’t just neglect a stablecoin like Dai. There are several good explanations:

  • Dai was never backed by any real financial institutions, so there wasn’t ever as much trust in it. USDC is collateralized by actual dollars held in a bank, which is valued much more by an average user who wishes for the stability of fiat finance.
  • Dai isn’t as simple. It’s minted by other cryptocurrencies, which seems weird. Without delving into the subject, you won’t be able to fully figure out how that works. Meanwhile, getting USDC or USDT is as simple as basically buying a USDC token for a dollar.
  • Dai also lacks a connection to the actual financial sector, which USDC and USDT have in abundance. These projects were created with the backing and blessing of actual financial institutions. They are regulated and centralized to a higher degree. This allowed them to be adopted much faster than Dai.

It’s not to say that Dai is bad in any way. It’s the same stablecoin as others. It never really dipped its value below $0.99, which is all you want from a stablecoin. It’s also accepted in many major and minor service providers on the Ethereum blockchain. It’s just slightly different, which makes life harder for it.

Should I get Dai?

There’s no reason not to.

Since all three major pegged tokens—DAI, USDT and USDC—are now used as native tokens on Ethereum, it’s just a matter of preference and what your favorite provider accepts as money. Other than that, it doesn’t have any practical differences. It’s different technologically, but that doesn’t mean much for an average user.

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© – , updated 08/28/2023
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