A Deep Dive on Stablecoins — Learn the differences between USDT, USDC and Dai
“Stablecoins are a category of digital token that are designed to remain stable in price relative to a specific asset, such as the US Dollar.”
Everyone knows cryptocurrencies are volatile. By their very nature, cryptocurrencies and other digital assets swing wildly in price, sometimes as much as 30% or more in a single day. We know by now that Bitcoin, Ethereum, and the entire decentralized finance ecosystem offer countless advantages over the traditional financial system, but what if we want to leverage these technologies without exposing ourselves to the wild price fluctuations of traditional cryptocurrencies? — This is where stablecoins come in.
Put simply, stablecoins are a category of digital token that are designed to remain stable in price relative to a specific asset, such as the US Dollar. There are lots of reasons one would prefer to hold, or transact in, a stablecoin. Some common examples are:
- You want to keep your funds in your digital wallet but don’t want to be exposed to the price fluctuations of other cryptocurrencies
- You want to accept cryptocurrency as payment for your business, but want to simplify your accounting by keeping everything denominated in USD.
- You want to leverage interest rates in the DeFi ecosystem, but don’t want to be exposed to the price fluctuations of other cryptocurrencies.
Typically, a stablecoin is backed by underlying collateral that ensures it can always be redeemed 1:1 for the asset it’s price is tied to. In other words, a US Dollar backed stablecoin will always be equal to $1USD. Let’s start by looking at the most simple example of a stablecoin — USDT, otherwise known as Tether.
USDT
USDT was the first major stablecoin. USDT is backed by a company called Tether. Tether is responsible for minting digital USDT and holding real USD in reserve as collateral. When a company, or high net-worth individual, wants to buy cryptocurrency, they can send their traditional dollars to Tether. When Tether receives their deposit, they mint an equal value of digital USDT and send it to the buyer. The buyer now has USDT in their digital wallet that is digitally representative of the dollars they originally deposited. They always know that USDT will remain stable in price, and they are free to trade it for any other cryptocurrency, at any time, with anyone who is willing to trade.
It also works in reverse. Someone could buy digital USDT on a cryptocurrency exchange and send it back to Tether. Tether would then destroy the USDT, and send the seller real US Dollars in exchange. Both of these methods together ensure that there is always enough money in reserve to buy back all of the USDT in existence — or so it would seem.
In recent years, there has been a lot of speculation about whether or not Tether actually has enough money in their reserves to buy back all USDT. There is almost certainly some truth to this, because Tether has been extremely opaque when it comes to their reserves. This is a little scary because if the naysayers are correct, Tether starts to look a lot like a ponzi-scheme. That is why virtually every educated digital asset investor recommends staying far away from USDT whenever possible. No worries though, there are other great options!
USDC
USDC is the natural evolution of USDT. While functionally identical, the major differences of these two tokens are: regulatory oversight and transparency. Circle is to USDC what Tether is to USDT. Circle was the first company to receive a BitLicense from the New York State Department of Financial Services. They also publish third party reserve audits on their website on a monthly basis. It is for these reasons that USDC is considered a safer alternative to USDT.
Even still, however, USDC is run by traditional corporations. One of their early backers was Goldman Sachs. Not only this, but it is still a centralized service, and isn’t decentralization the ethos of cryptocurrency? Sure, USDC is a valuable part of the ecosystem, but there must be something better. A decentralized solution. — with that said, I’d like to introduce you to Dai.
DAI
Named for the Chinese character 貸, meaning to lend or to provide capital for a loan (coincidentally, also the last name of Wei Dai, the inventor of the concept of cryptocurrency), Dai is what is known as an algorithmic stablecoin. The primary differences between the first two examples (USDT & USDC) and Dai, are that Dai is governed algorithmically by a DAO (decentralized autonomous organization) and backed by reserves of cryptocurrency — It perfectly fits the definition of decentralized, trustless stablecoin.
So how exactly does it work? Well it works similarly to our other two examples, but instead of a company responsible for minting tokens and keeping reserves, these actions are managed through a series of smart contracts on the Ethereum blockchain. Because the entire system is managed in a decentralized, trustless, transparent way, Dai is widely considered the most secure and most trusted stablecoin of them all.
Dai and MakerDAO, the decentralized autonomous organization responsible for governance, was created by the Maker Foundation, a non-profit dedicated to bootstrapping MakerDAO to fuel growth and drive the organization toward complete decentralization.
There are many other examples of stablecoins out there, and we encourage you to read more to learn about them. We hope that this article has been helpful in allowing you to make stablecoins yet another tool in your digital asset investing toolbox. If you’re interested in how we can help you succeed even further, we encourage you to check out the Ethereum Index. The Ethereum Index is an index fund that seeks to provide investment results that correspond generally to the price and yield performance of the greater Ethereum ecosystem. The Ethereum Index intends to hold tokens from projects involved in decentralized finance, on-chain oracles, and algorithmic stablecoin issuance. Invest today!
The Ethereum Index is built on Enzyme Finance. Enzyme is a decentralized asset management infrastructure built on Ethereum. It allows asset managers to build on-chain investment products that utilize and allocate to the newest innovations in decentralized finance. Because all transactions occur on the Ethereum blockchain, compliance, accounting, and investor management services are rendered programatically and at a dramatically-reduced cost to their traditional finance counterparts.
