ne of the main issues in using crypto tokens for payments is their volatility in the market. Stablecoins were created to alleviate this shortcoming and harness the speed of digital transactions with the dollar’s stability. The most popular stablecoins right now are USDT and USDC, which are backed by reserves of the US dollar. The DAI stablecoin is trying to shake up the landscape by holding its reserves in other crypto tokens. But which of them is a better investment, DAI or USDT?
What is DAI?
DAI is an Ethereum blockchain based stablecoin. Its development and minting are controlled by the MakerDAO. Unlike other stablecoins, DAI is backed by several other crypto token reserves to maintain its peg to the dollar. Each time a new DAI is minted, a collection of crypto assets is locked into a smart contract as collateral.
This process works as a loan. If you wish to obtain DAI, you must submit at least 150% of its value as collateral in other tokens. Most traders usually keep 300-400% of the value as collateral due to the volatility of the crypto market. If you are unable to meet the required amount of collateral, any tokens you have already submitted will be sold off to cover the loan.
What is USDT?
USDT is one of the oldest examples of a stablecoins in crypto. Like other stablecoins, it was created to protect users transacting in crypto from its price volatility. However, unlike DAI, USDT is backed by a one-to-one reserve of US dollars. This allows the convertibility of your tokens back into US dollars on demand.
USDT is issued by a company called Tether, based in Hong Kong. Their reserves are managed by a consortium of financial institutions. Additionally, these reserves are regularly audited by third parties to ensure transparency.
Key Features of DAI
Decentralised Governance
The smart contracts that power the DAI ecosystem are known as the Maker Protocol. This is developed and governed by the MakerDAO, a decentralised autonomous organisation. If you own MKR – the native token of the DAO – you can vote on key initiatives and upgrades for the protocol.
Financial Freedom
It is simple to generate DAI as and when you want. As long as you meet the collateral threshold, you can borrow the stablecoin from the network for your transactions. This provides stability in crypto transactions while providing you with the freedom to use the digital medium.
Income Generation
The DAI Savings Rate system allows you to earn rewards for locking your DAI in smart contracts. Similar to staking, DAI tokens are continuously added to the smart contract based on the current savings rate. It gives you a means of passive income while participating in the governance of the platform.
Key Features of USDT
Time in the Market
Tether has been in the stablecoin market since 2014. They have had a chance to prove the safety and effectiveness of USDT over several years. It has a strong track record of sticking to its target of $1 per coin.
Convertibility
Since USDT is backed one-to-one by US dollars, it is easy for you to turn your tokens back into fiat money. This makes it simpler for businesses to accept payments in USDT while operating with only US dollars.
Low Fees
There is no transaction fee when performing a transaction in USDT. Only a small fee is levied when converting other crypto assets into USDT, or turning your tokens back into US dollars.
Advantages and Disadvantages of DAI
| Advantages | Disadvantages |
| The DAI token is decentralised | Crypto market swings may affect the borrowers of DAI |
| You can lock your DAI in a smart contract and Earn interest | Lesser Market Cap |
| DAI can not only be bought, but generated because of decentralised protocols | Altleast 150% of the borrowed amount should be kept as collateral |
Advantages and Disadvantages of USDT
| Advantages | Disadvantages |
| One of the oldest and most trusted Stablecoin | Its controlled by Tether which does not make it fully decentralised |
| Easy to turn your tokens into Fiat | Tether’s 1:1 ratio of reserves has been questioned several times |
| Value of Tether has managed to stay at roughly $ 1 since its inception | Bank deposits should be made to receive USDT tokens which removes anonymity |
Read more: Difference Between USDT and USDC
A Snapshot of DAI vs USDT
| Features | DAI | USDT |
| Market Cap | $5,658,965,722 | $65,340,140,669 |
| Current price | $1.0 | $0.9997 |
| 24 hour volume | $197,726,008 | $33,798,827,624 |
| ROI ( From ICO) | 1.20% | 0.04% |
| All time high/low | $1.14/$0.95 | $1.21/$0.605 |
| Circulating Supply | 5.66 Billion DAI | 65.36 Billion USDT |
How Safe is DAI?
Crypto is a volatile asset class. While most loans on the DAI platform are overcollateralised to almost 400% of the value, some users may only put up the minimum amount of collateral. In such cases, wild swings in crypto prices can still affect those that borrow too much from the platform.
However, there is no counterparty or credit risk. Since there is no individual lender on the other side of the transaction, failure to pay does not impact another user on the network. DAI has managed to maintain its soft peg to the dollar without many deviations.
How Safe is USDT?
USDT is the most dominant stablecoin in the market. It is one of the most widely accepted coins in the industry and has the highest market capitalisation of all stablecoins. However, there is considerable counterparty and credit risk with USDT since it is a fiat-backed coin.
On the other hand, the fees for using this network are very low. It is also simple to acquire and easily convertible back to US dollars for individuals and businesses.
Read more: What Is Dollar Cost Averaging In Crypto
The Verdict
Is DAI a good investment? DAI provides an interesting alternative to the stablecoins that have dominated the market so far. It allows you to commit your ETH as collateral and use DAI without fear of major price shifts. However, Tether has more than 10 times the market capitalisation of DAI. This is because of their easy convertibility and regular auditing.
If you already have large holdings in ETH and wish to transact using stablecoins, DAI is a safe choice. Tether is a great general choice that has been the default for transactions in the industry for a long time. If you want simple transactions with low fees, Tether may be your best option.
FAQs
Is DAI backed by USDT?
No the DAI stablecoin is not backed by USDT. DAI represents an Ethereum backed stablecoin. Other than Ethereum, there are several other cryptos backing USDT.
Is DAI a Stablecoin?
Yes DAI is an Ethereum blockchain based Stablecoin with its reserves in other crypto tokens. Its development is controlled by the Maker DAO. Each time a new DAI is minted, a collection of crypto assets is locked into a smart contract as collateral.
Is DAI safer than USDT?
Both DAI and USDT are reputed. DAI works in a decentralised manner while Tether is backed by a single entity. At the same time, Tether is backed by stable fiat where as DAI is backed by crypto tokens. Choosing one out of the two depends on the trust one has on the protocols they are governed with.
