Tether’s USDT and DAI are two of the most popular stablecoins out on the crypto market. A stablecoin is a cryptocurrency that attempts to offer price stability and is backed by a reserve underlying asset. It offers the best of both worlds—the instant processing and security or privacy of payments of cryptocurrencies and the volatility-free stable valuations of fiat currencies. However, DAI tends to differ a bit from that definition and in other factors.
This will compare and contrast DAI and USDT by taking a look at what makes them the same and what makes them different, as well as provide guidance on which stablecoin should you buy
DAI vs USDT Comparison Table
|Launch Date: 2017|| |
Launch Date: 2014
|Transparency: High||Transparency: Medium|
Open Source: Yes
Open Source: Hybrid
Platform: Ethereum, Omni Protocol, BitCoin
|Platform: Omni Protocol, BitCoin|
There are two main differences between DAI and USDT. Firstly, USDT is a centralized stablecoin in that it is supplied by a Hong Kong-based company called Tether. By contrast, DAI is a decentralized stablecoin, as it is not controlled by a centralized entity but rather via the community who deposit ETH as collateral in order to mint DAI (more on this in a bit).
Secondly, USDT is a fiat-collateralized asset that’s backed by the US dollar. In order to peg the token to the USD, Tether needs to maintain a substantial reserve of USD to back up the amount of USDT in circulation. For example, if there is $1 billion USDT in circulation, that would mean Tether would need to have $1 billion of USD in reserve in order to back those tokens up.
DAI, on the other hand, is a crypto-collateralized stablecoin. It is stabilized by external market factors such as collateralized debt positions (CDPs), autonomous response mechanisms, and external economic incentives. Dai is more decentralized because only users can create and destroy the token (DAI tokens appear only after the deposit has been paid and disappear after payment of the debt).
What is DAI?
Dai is decentralized and backed by crypto-collateral. It aims to empower and facilitate greater security, transparency, and trust towards the Maker Protocol, on which the DAI can be generated and traded. Dai (DAI) is a stablecoin built on the Ethereum (ETH) blockchain. It attempts to maintain a value of $1.00 USD. Unlike centralized stablecoins, Dai isn’t backed by US dollars in a bank account. Instead, it’s backed by collateral on the Maker platform, using the MKR token.
The idea behind Maker DAI is to create a rock-solid, trust-based stablecoin. The underlying asset in DAI’s case is the US Dollar. The purpose of a Stablecoin is to eliminate a crucial problem that cryptocurrencies tend to face – volatility. There is, however, a crucial difference between DAI, which is built on the maker platform, and other stablecoins. Basically, DAI’s value proposition is that it combines the stability of a stablecoin with the truthfulness of the decentralized Ethereum blockchain.
Maker DAI allows any person to deposit their ETH as security and use the resulting new DAI tokens by creating a CDP. The user can trade these DAIs on the secondary market on various exchanges against multiple cryptocurrencies and fiat currencies as well.
It’s simple: against a deposit of ETH as collateral, a CDP is issued as a financial instrument, the credit amount of which is issued in the Stablecoin DAI. The deposited ETH remains locked until the issued DAI is repaid.
Decentralized – A price-stable currency that allows users to instantly generate DAI on their own terms. Value is derived as one can obtain liquidity without having to forgo any of their ETH tokens.
Community Governance – MKR token holders community control and govern the Maker Protocol, the smart contracts that powers Dai.
Rapidly expanding ecosystem – Currently, 400+ applications have integrated Dai, including wallets, DeFi platforms, games, and more.
Limited supply and growing demand – MKR is burned with each transaction, which means that the number of MKR coins in circulation will decrease over time. This could be a classic demand/supply issue, like BitCoin, as its supply diminishes, the value of MKR and DAI is likely to increase.
When executing any transactions, ETH is required to pay the miners. Because of the popularity of Ethereum, the network has become very congested, resulting in very high transaction fees.
The DAI stablecoin is the epitome of what the crypto sector is all about. It is decentralized, community-governed, with virtually anyone who can mint new DAI if they provide collateral. However, because it resides on Ethereum, the biggest hurdle for the stablecoin is its high fees and scalability issues. But with sidechains such as Polygon and the eventual release of ETH 2.0, those problems will eventually be mitigated.
Pros & Cons
What is USDT?
Established in 2014, Tether (USDT) is one of the oldest Stablecoin in the marketplace. It was created to protect its stakeholders from the price volatility that cryptocurrencies experience by preserving a one-to-one reserve ratio among the crypto token, i.e. tether and its associated fiat currency/real-world asset, in this case, the US Dollar. It was devised as a solution for investors to transfer assets from one exchange to another for minimal fees.
USDT does not have its own blockchain — instead, it operates as a second-layer token on top of other cryptocurrencies’ blockchains: Bitcoin, Ethereum, EOS, Tron, Algorand, Bitcoin Cash, and OMG, and is secured by their respective hashing algorithms.
Once a Tether is issued, the user can store it, transfer it, or spend it just like any other cryptocurrency. The fiat currency held in reserve is then transformed, acquiring the properties of a cryptocurrency while having its price stabilized [tethered] to the price of the fiat. Tether tokens have zero transaction fees, can be easily traded on exchanges, and can also be held in almost any crypto wallet. Tether Limited, the custodian, does, however, charge a small fee while issuing new tokens, to generate revenue.
At the time of writing, Tether maintains market leadership among stablecoins, both in terms of market capitalization as well as volumes.
The oldest stablecoin – Tether, is a proven concept, and over time has been shown to be the most stable.
Market Capitalization and Leadership Position – Tether dominates the current stable coin trading volume landscape with a 93% market share among Stablecoins. In addition to that, it has availability among 396 crypto pairs, making it extremely liquid and popular.
Exchange Support – Tether adoption forced exchanges that do not offer US dollar customer accounts to adapt and re-design their offerings. As Tether is increasingly used as a hedging and risk management tool to counter cryptocurrency price volatility risks, exchanges have had to provide for this arrangement.
Apart from Tether charging a small fee when minting a new USDT, the only other fee that needs to be paid are the transaction fees when initiating a transaction on the blockchain.
Traders fundamentally believed in Tether, and that is the main reason for its market dominance. However, the issues and concerns Tether is facing, in terms of counterparty and credit risk, lack of clarity with respect to legal rights, and its increased dependency on Tether Limited, offers an opportunity for other providers to issue alternative stable coins. This might be the reason for the market share of USDT to have fallen.
Pros & Cons
DAI vs USDT: Conclusion
In conclusion, both stablecoins really serve the same purpose, but they differ in the way they operate with respect to the network they are built on, automation, complexity, etc. Tether has the advantage of being the oldest, while DAI has the advantage of being open-source, trusted, and decentralized. Tether has counterparty and credit risk, but DAI has an issue with its complex design. With this in mind, one needs to decide what suits their needs the best. Tether is great for traders, as it can be used in a more comprehensive way on exchanges for trading, but if one is looking to shop on DApps, DAI is the most preferable to use.