Cryptocurrency is a digital asset known for its volatility. However, for stability lovers, there are so-called stablecoins, which allow fiat currencies such as the US dollar or other stable assets to be represented on the blockchain in the form of digital tokens. Thus, stablecoins are a kind of crypto that allows anyone to have a synthetic form of fiat currency, specifically designed to maintain its value to the fiat currency it represents. Often, one US dollar in a stablecoin tries to maintain the existing value of the dollar. Since stable assets on the blockchain have gained recognition and popularity, the total value of all stablecoins is about 30 billion dollars.
How Does Tether Work?
Today we will analyze the concept of a stablecoin in more detail, as well as pay attention and compare two popular cryptocurrencies - DAI and USDT. You will get how these stablecoins work, how secure they are, and see the main differences between them.
What Is a Stablecoin?
A stablecoin is a cryptocurrency pegged to a more stable asset as a basis for its value. For price stability, stablecoins can be backed by external assets (secured) or use algorithms that dynamically adjust their supply depending on the demand for them at a given time (algorithmic).
Now, stablecoins are divided into two groups - centralized and decentralized. Centralized coins are often pegged to fiat currency, such as the U.S. dollar (which functions as a reserve that backs tokens on the blockchain), precious metals, and even other cryptocurrencies. Decentralized stablecoins are coins that maintain their exchange rate through Smart contracts and are more stable and transparent because they are not controlled by one party. Stablecoins are less volatile with a bigger potential to be the currencies people already use daily.
What Are the Features of Stablecoins?
- They are open, worldwide, and highly accessible on the Net 24/7;
- They’re quick, cheap, and secure to send;
- They’re native to the Internet and programmable.
What Are the Main Types of Stablecoins?
What Is $USDT?
- Market cap: $80,243,356,994
- Fully diluted market cap: $83,131,593,794
- Circulating supply: 80,210,538,011 USDT
- Price change history: $0.84 - $1.077
Tether is a stablecoin pegged to fiat. This cryptocurrency was issued by a Hong Kong-based company and is considered a crypto dollar in the cryptocurrency world. The point is that 1 USDT is stable and remains equal to $1—not more or less. «The token’s peg to the USD is achieved via maintaining a sum of commercial paper, fiduciary deposits, cash, reserve repo notes, and treasury bills in reserves that are equal in USD value to the number of USDT in circulation» - CoinMarketCap. Thus, Tether, unlike Bitcoin, is centralized, as it is tied to a real currency (the first name of the coin was also Realcoin).
The main goal of Tether was to create a coin with a stable value of the US dollar, which can be sent between users without intermediaries. However, even though Tether users are preserved from the volatility of cryptocurrency, they’re still open to fluctuations in the pegged fiat currency’s price.
How Does Tether Work?
Firstly, USDT tokens do not have their own single blockchain but are created on existing cryptocurrency platforms. Initially, since the launch of the project in 2014, all Tethers were based on the Omni Platform, which is a software layer built on top of the Bitcoin network and facilitating interaction with its blockchain. Ethereum-based Tether coins were also launched, and now it's their most-utilized network. However, Tether tokens exist on over 8 blockchains, such as Ethereum, Avalanche, Algorand, Binance Smart Chain, Solana, Tron, etc. This allows USDT to be used in their ecosystems, which are presented in the form of modern decentralized applications developed based on smart contracts and managed without human intervention.
As mentioned, USDT is backed by fiat currency (US dollar), and the Tether peg is maintained through collateral. For every 1 USDT in existence, there’s a US Dollar worth of currency or other assets stored in a deposit. For 1 USDT to be worth $1, it must be refundable at any time for $1 of fiat currency, so Tether and exchanges must keep a reserve of dollars to back every existing USDT. It is also worth noting that USDT is only straightly convertible to USD through a limited number of exchanges or through Tether itself.
What Is $DAI?
- Market cap: $5,259,019,627
- Fully diluted market cap: $5,258,849,211
- Circulating supply: 5,264,001,767 DAI
- Price change history: $0.96 - $1.09
Before moving on to DAI cryptocurrency, we want to draw your attention to MakerDAO, an Ethereum-based smart contract platform that allows you to issue a DAI stablecoin against cryptocurrencies and real assets. The first version of MakerDAO was launched in December 2017 and the platform is still running and developing on a fully decentralized basis with the help of DAO. Thus, the Maker Protocol is the architecture underlying the DAI stablecoin. Also the answer to the question “is DAI an algorithmic stable coin” is yes.
DAI is a unique stablecoin created by the developers of MarkerDAO and, unlike centralized cryptocurrencies, is built on Ethereum Smart Contracts. Thus, the protocol users themselves issue DAI stablecoins.
This cryptocurrency is known because it is decentralized. For example, if we compare DAI Vs USDT, the difference will be that Tether provides a cryptocurrency pegged to fiat and controlled by a central organization. At the same time, no one can control the DAI issuance. Instead, users looking to hold DAI submit Ethereum-based assets into a smart contract that uses them as collateral in maintaining DAI’s peg to the U.S. dollars.
Another distinguishing feature of DAI is that while many stable moments are backed by only one fiat currency, such as the dollar, DAI can use various cryptocurrencies as collateral: ether (ETH), basic attention token (BAT), USD Coin (USDC), wrapped bitcoin (wBTC), compound (COMP), and others. The increased number of collateralizable currencies reduces user risk and increases the likelihood that the DAI price will remain stable. In addition, DAI cryptocurrency makes it possible for its holders to receive interest for holding the coin.
How Does DAI Work?
When answering the question of how DAI works, it is first crucial to mention that this is an ERC-20 token secured by Ethereum’s Wthash algorithm. You can purchase this cryptocurrency from both centralized exchanges (CEXs) and decentralized exchanges (DEXs). However, what is DAO backed by? “The Dai stablecoin is a collateral-based cryptocurrency soft-pegged to the U.S. dollar. Users generate Dai by depositing crypto-assets into Maker Vaults on the Maker Protocol” - CoinMarketCap.
Also, if you have a Maker collateral vault with MakerDAO's Oasis Borrow dashboard, you can generate and borrow DAI (if you have and store Ethereum-based assets as collateral). Maker collateral vault is a smart contract that has collateral until the borrowed DAI has been returned. The collateral value you deposit must overtake the DAI value you are issued, and if it is below the value of the issued DAI tokens, then your collateral will be eliminated. Once borrowed, DAI can be used in decentralized finance (DeFi) apps, blockchain-based games, and other places.
DAI VS USDT
The eternal question, is what to choose - Dai or Tether? There is no definite answer to it, but we compared the pros and cons of both coins.
- Stable price backed by the U.S. dollar. Despite the volatility of cryptocurrencies, coins like DAI remain stable as long as the US dollar is stable.
- Financial freedom. Before receiving a bank loan, the bank will carefully check your financial statements, while for borrowing DAI you need collateral to deposit to take out a loan.
- Money transactions anytime. With DAI, you can avoid “banking hours” and high fees and get financial management security due to smart contracts and two-factor authentication safety measures.
- Adopted the DeFi app. DAI has already integrated within 400+ apps including DeFi apps, games, wallets, etc. Because of DAI's stability, users can be more confident in taking loans, sending, receiving, and investing with stablecoin.
- Liquidity. Now DAI is only listed on a few big exchanges and thereby doesn't have that many trading pairs compared to centralized stablecoins such as USDT.
- Ethereum Dependent. DAI is collateralized by Ethereum (which is way more volatile than the US Dollar), so DAI holders are at greater risk than centralized stablecoins. Thus, the answer to the question is DAO safer than USDT is no, as it is not backed by fiat currency.
- Peg Stability. Again, since DAI is collateralized by a volatile asset in Ethereum, this coin tends to fluctuate more than centralized stablecoins.
- Maximum stability. The main advantage of fiat-backed stablecoins is their stability, which means 1 USDT is equal to 1 $USD. As long as the dollar remains stable, USDT is a stable cryptocurrency.
- Transaction cost. In the case of transferring money from one USDT account to another, you will need to pay fees for that. However, when exchanging USDT for other cryptocurrencies or fiat, the fee is small.
- Highly flexible stablecoin. Practical all exchange platforms have pairs to trade since USDT is easy to integrate into them. Since this coin is backed by the US dollar, buyers are guaranteed the value of this cryptocurrency.
- Reputation. Achieving such a large market cap in such a short time is still a mystery. Moreover, USDT stablecoin was used several times to perform gray operations in crypto markets (such as price manipulation of other cryptocurrencies).
- Lack of anonymity. Since you need to make a bank deposit to create the tokens, this removes the privacy that gives your data to the company.
- Lack of decentralization. Is USDT centralized? Yes. Since Tether controls it, this coin is dependent on this company and can’t be fully decentralized.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.