As a result, this asset class has gathered a massive following and adoption. At the start of the year, the total supply of stablecoins was valued at about $29 billion. However, the stablecoin sector boasts a valuation of over $159 billion as of December 23.
The growing interest in stablecoins comes from their functionality, as they offer the rapid processing speed and privacy that comes with cryptocurrencies and the stability attributed to fiat currencies.
According to CoinMarketCap, there are currently 73 stablecoins on the market, all either backing one fiat currency or the other, company stocks or commodities, or a basket of crypto. However, two particular coins, USD Coin (USDC) and Dai (DAI) have caught the attention of many investors of late.
In this article, we explore the ins and outs of these stablecoins, why they are so popular, which of them is superior, their similarities, and many more. We also give a brief introduction to stablecoins and what they entail. Without future ado, let’s get started!
Stablecoins: A Brief Introduction
Stablecoins are stable crypto-assets designed to maintain a fixed price regardless of fluctuations in demand or supply. Unlike other crypto assets like Bitcoin or Ethereum, stablecoins do not change according to market behavior.
Some stablecoins are centralized projects, meaning that the value of these coins is backed 1:1 by real assets held by the issuing companies. Other stablecoins are decentralized projects and are backed by innovative methods of keeping prices fixed, which do not rely on intervention from a centralized company or entity.
Decentralized stablecoins, as the name suggests, are open to public scrutiny, meaning that interested individuals can view the project’s block explorer and see what goes on behind the curtains.
While most stablecoins are pegged to the US dollar, other more innovative tracking models are emerging. Some stablecoins mirror the price activities of other fiat currencies and other track assets like company stocks and commodities.
That said, let us move to the focus of this article, evaluating USDC and DAI.
Understanding USD Coin (USDC): The Centralized Stablecoin
With a market valuation of $43.28 billion, USDC boasts the number eight spot in crypto rankings by market cap and is the second-largest stablecoin. USDC is the product of a joint venture between Circle and Coinbase in May 2018 and is based on the Ethereum network. However, the coin can also be transferred and used on other blockchains, including Algorand, Stellar, and Solana.
New USDC coins are minted by investors after passing the KYC requirement and depositing US dollars on Circle. That said, the redemption of funds automatically removes the underlying amount of USDC out of circulation.
In a situation where the value of one USDC goes above the $1 mark, an arbitrage opportunity opens up, meaning that a trader can swap US dollars for a token valued at $1.01 or $1.02. This increases the supply of USDC in circulation to ensure that the price recovers to a more even peg with the dollar.
The same is true in a reverse situation, where investors are incentivized to return USDC tokens worth less than a dollar and receive US dollars that are worth more. This mechanism ensures that the price of USDC remains stable perpetually.
USDC operates as a mainstay of the Ethereum DeFi ecosystem, where it provides stable liquidity on platforms like Uniswap or for lending activities on dApps like Aave and Compound.
Understanding Dai (DAI): The Decentralized Stablecoin
One of the downsides of centralized stablecoins like USDC is that the issuing company, in this case, Circle, can freeze funds on request by law enforcement. While this has its benefits from an ethical standpoint, it goes against the decentralization principles of the crypto industry. This is an aspect where DAI shows unarguable superiority.
Launched in December 2017 by MakerDAO on the Ethereum network, DAI currently boasts a market valuation of $9.28 billion and is the fifth-largest stablecoin (twenty-second-largest crypto).
To mint new DAI, traders have to deposit collateral with MakerDAO. That said, Maker accepts a wide variety of collateral, including ETH, WBTC, BAT, and many more.
Once the collateral deposit is confirmed, the trader can generate the agreed amount of DAI. That said, the more collateral deposited, the more DAI a trader can mint. Many traders use this as a “HODLing” tool for crypto assets with promising long-term prospects while applying the newly-minted DAI to profitable use on the market.
When collateralizing Ethereum, MakerDAO requires a minimum collateralization ratio of 150%, meaning that for every $1 worth of DAI minted, there must be at least $1.5 worth of Ethereum (collateral) backing it. That said, if the collateralization ratio falls below 150%, the trader’s collateral is immediately liquidated to finance the loan. For this reason, most traders allow between 300% to 400% for the collateralization ratio, considering how volatile the crypto markets can become.
Meanwhile, the DAI loan accrues little interest while it is active. To repay a loan, the trader must deposit the borrowed DAI with Maker DAO. That said, there is no time limit on how long a loan can stay active, and Maker has no say in what traders do with the borrowed DAI.
Dai has a wide variety of use cases across the crypto space and works excellently as a savings tool. It also provides round-the-clock, all-year-round instant international remittance and financial transparency.
With these attributes and many more, DAI could be better-positioned to dominate the crypto space in the future than USDC.
Key Similarities and Differences Between USDC and DAI
Similarities Between USDC and DAI
Both USDC and DAI are products of the Ethereum network.
Both stablecoins are available for purchase on virtually every major crypto exchange.
Both stablecoins utilize smart contracts.
Both USDC and DAI serve as reliable hedges against shaky market conditions and volatility.
They both have interest-generating and lending programs.
USDC and DAI are both open-source projects
Differences Between USDC and DAI
While they have several similarities, USDC and DAI have significantly varying features, including:
USDC is owned by an entity, while DAI is not owned or controlled by anyone.
As mentioned earlier, USDC is a centralized project while DAI is decentralized.
Collateralization and Ecosystem
USDC is backed 1:1 by the US dollar, while DAI is backed by crypto asset collateral.
Market Capitalization and Dominance
USDC currently boasts of a $43.28 billion valuation and claims the number eight spot in crypto rankings, while DAI is only worth $9.28 billion and ranks number 22 in top crypto rankings.
While DAI steals the shine in terms of decentralization and multifunctionality, USDC trumps it in safety because it is collateralized by real dollars and other stable traditional assets.
Due to its operational model, DAI’s existence is dependent on the sustenance of MAKER and Ether. To make matters worse, this risk is exacerbated by the fact that DAI is not backed by any traditional assets, like the USD, in its reserve.
This risk showed itself in March last year when Ethereum crashed by over 30%, putting DAI in a compromising state. At some point, MakerDAO briefly considered shutting down the entire operation. Thankfully, it never came to that. The company learned from this and decided to back a sizable amount of DAI with USDC.
What this means is that USDC is a safer bet for trading or investing in for the long term.
While decentralization is a crucial component for securing relevance in the likely-decentralized finance future, it is not everything; stability and security are also important. Investors need to know that their funds in a stablecoin would remain unscathed in significantly volatile situations or “Black Swan” events. For this reason, we believe that USDC remains the overall superior stablecoin compared to DAI.
While DAI will continue to service tech-savvy investors in the crypto industry and the financial world, USDC has the hearts of risk-averse investors, including institutional investors, in the crypto space.