The differences between USDT vs USDC vs DAI - which is the best stablecoin?
Stablecoins are the bread and butter of the crypto industry, with the two most popular dollar-pegged assets being USDT and USDC. But MakerDAO’s DAI stablecoin is also extremely important for the crypto ecosystem.
Stablecoins mean that we can pay each other for services without worrying that the value of our payment will dramatically decrease one day later.
But which stablecoin is the best for use in your daily crypto activities? Which stablecoin is more secure, and, more importantly, has a better future?
There are many differences between USDT, USDC and DAI, and so we have placed these three popular stablecoins side by side for the full lowdown.
What is a Stablecoin?
Stablecoins are cryptocurrencies that are designed to maintain a fixed price, no matter how many coins are bought or sold. They act as an antidote to cryptocurrencies like Bitcoin and Monero, which are very volatile and have a price that constantly changes according to market behavior.
Some stablecoins are centralized projects, so users of these currencies have to trust that the value of these stablecoins is backed 1:1 by reserves held in the accounts of the company that deploys the coin.
Other stablecoins are decentralized, and are backed by more novel methods of maintaining a fixed price peg which, crucially, don’t rely on intervention from any kind of centralized company or entity.
Decentralized stablecoins are transparent, meaning that anyone can check on the platform’s block explorer and see exactly how the cryptocurrency is working behind the scenes.
Most stablecoins are “pegged” to the US dollar, but as the crypto industry matures, new stablecoins that mirror the price of other government currencies and other types of assets such as company stocks (Apple, Netflix etc.) and commodities (Gold, oil etc.) are being brought in.
What is USDT?
USDT is a stablecoin issued by the Tether company, which is based in Hong Kong. As one of the oldest stablecoins on the crypto market, it has a huge amount of liquidity on various exchanges, and rarely strays out of the top 5 cryptocurrencies ranked by market capitalization (the amount of tokens in circulation multiplied by the value of the coin).
The main usage of USDT seems to be as a trading pair on exchanges, where it can shield investors from volatility, or allow traders to “stack” dollars against cryptocurrency, slowly growing the dollar value of their portfolio.
USDT was originally built on the Omni Protocol, a software layer built on top of Bitcoin which facilitates the creation and trading of custom crypto assets. The stablecoin then branched out onto Ethereum’s ERC20 network, where it was used widely until high gas fees prompted Tether to further branch out onto more scalable blockchains, such as Tron, Solana, Bitcoin Cash, EOS and Algorand.
The Tether company claims that the price of USDT will always remain at one dollar, as each new coin minted is backed by a dollar-equivalent amount of cash or assets being added to the company reserves. There has been a lot of controversy surrounding the transparency of Tether’s accounts, though, and this is something we will come back to later.
Those who are interested in using the Tether stablecoin can follow this link for a guide on how to buy USDT, and where it can be bought.
What is USDC?
USDC is a stablecoin run by a joint partnership between Circle and Coinbase. Most USDC is based on the Ethereum network, but the coin can also be transferred across the Algorand, Stellar and Solana blockchains.
Investors can mint USDC by passing a KYC (Know Your Customer) check and then depositing US dollars on Circle. They receive USDC tokens at a 1:1 ratio, and can then use the stabelcon within the Coinbase ecosystem, or further afield. If desired, the US dollars can be redeemed later by returning the USDC tokens and taking them out of circulation.
If the value of USDC strays over 1 dollar, the resulting arbitrage opportunity means that traders can swap US dollars for a token that is worth $1.01 or $1.02, for example.
This puts more USDC into circulation, making sure that the price returns quickly to a more even peg with the dollar.
The same dynamic also works in reverse, where investors would be incentivized to return USDC tokens that are worth less than a dollar and receive US Dollars which, in that situation, would be worth more.
This simple mechanism keeps the price of USDC stable. USDC is used as a mainstay of the Ethereum DeFi ecosystem, where it can be used to provide stable liquidity on Uniswap, or for lending / borrowing mechanisms on dApps (decentralized apps) such as Aave and Compound.
USDC vs USDT - Which is Better?
One thing going for USDC is that it is pegged 1:1 to actual US dollars, which are held in reserve bank accounts, and is subject to regular attestations to ensure that it stays this way.
USDC is generally well-trusted and respected around the space, and perhaps that’s why it was able to score a partnership with Visa and Crypto.com to allow payments to be settled in USDC right across the Visa payment network.
This was huge news for the entire crypto market, which responded by jumping up to all-time highs on the back of the news, when it was announced in March 2021.
Tether might have roughly 3x the amount of exchange liquidity and volume right now, but USDC seems to be the favorite of regulators in the US and, for this reason, definitely has the upper hand when it comes to future prospects.
It has been traditionally less clear which assets are backing Tether USDT, and the exchange has courted suspicion by having a murky relationship with the crypto exchange, Bitfinex.
After years of speculation and even investigation by the US Department of Justice, Tether has this year finally released a report with a breakdown of the assets that back up the USDT coin. Over 75% of these are liquid assets, and the rest are made up of secured loans, bonds, commodities and other investments including digital assets.
Within that 75% of liquid assets though, only 3.87% is actually listed as cash, whereas 65% of the total is made up rather vaguely of “commercial paper,” which are basically IOU notes made between financial institutions.
The Tether company is understandably keen to tell the world that the “Tether FUD” is solved and it’s time to move on, but considering how much time it took them to finally reveal their assets, this vagueness does not look good.
USDT may still be convenient for a quick trade, but for long-term holding or earning interest in lending/yield farming, USDC probably remains the best bet.
What is DAI - the Decentralized Stablecoin
One problem remains for USDC - the Circle company can, and actually already have, frozen USDC funds on request by law enforcement. Although this may sometimes be desirable on an ethical level, it goes against the ethos of the decentralization of power that pervades the crypto space.
Enter DAI, which is a fully decentralized stablecoin. To understand how DAI works, it’s also important to understand the MakerDAO platform, which was the first decentralized lending platform on Ethereum, and a pioneer of the DeFi movement.
To mint DAI, A trader deposits collateral with MakerDAO. Maker accepts many types of collateral, including coins like ETH, WBTC and BAT.
Once the collateral has been deposited in Maker, the trader can generate a certain amount of DAI. The more collateral a trader deposits, the more DAI they can mint. Traders often use this as a way of HODLing assets with good long-term fundamentals (such as Eth) whilst still being able to trade DAI and take advantage of what will hopefully be a booming crypto market.
When locking Ethereum, there is a minimum collateralization ratio of 150%. This means that for every $1 of DAI created, there must be at least $1.50 of collateral (ETH) backing it. However, most traders keep a 300 to 400% collateralization ratio, given how volatile cryptocurrency prices are. If the collateralization ratio drops below 150% the trader’s collateral will be liquidated to pay off their loan.
The DAI loan accrues a small amount of interest the entire time that it’s active, and to close out the loan, the trader must deposit DAI with MakerDAO. There is no limit on the duration of loans, and the MakerDAO platform cannot control what DAI users do with their tokens.
DAI was a revolutionary product when the MakerDAO platform first went live, and as such, there were some teething problems. The Maker community introduced some good solutions to these problems, though, and the DAI peg has stayed consistently around 1 dollar ever since.
Dai has a number of compelling use cases across the crypto ecosystem, and is an invaluable tool for savings (that cannot be seized), 24/7 instant international remittance, and financial transparency.
For those reasons, it appears that the DAI stablecoin might be the best bet for the future.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.