USDT vs. USDC vs. DAI: What are the similarities and differences?
Stablecoins are cryptocurrency tokens whose exchange rate is linked to an asset, such as a dollar, euro, or gold. Linking to an asset means that the value of a stablecoin depends on the cost of the linked asset. Theoretically, this makes stablecoins a less volatile form of cryptocurrency.
Unlike other cryptocurrencies, such as Bitcoin or Ethereum, which can experience significant price fluctuations, stablecoins are designed to minimise volatility and provide a reliable store of value. However, there are examples when stablecoins have lost their bindings, so the stability of their price is not guaranteed.
Stablecoins represent a link between fiat and cryptocurrencies. They are used for various purposes and are an essential part of modern crypto trading. Therefore, regardless of whether you plan to trade stablecoins, it is important to understand the mechanism of operation of this type of cryptocurrency.
In this article, we will tell you what stable coins are, look at the leading projects, and explain the reason for their popularity.
What stablecoins are?
The idea of creating stablecoins was not new. In the classical banking system, such a mechanism is called a fixed exchange rate. See our Beginner's Guide: Navigating the World of Stablecoins here.
A stable cryptocurrency is tied to an official asset that has a fixed value in the real world. As already mentioned, it can be gold, national currency, oil, etc. The emergence of digital money, which is not subject to sharp fluctuations in the exchange rate, led to an increase in the turnover of coins and had a beneficial effect on trading operations with them.
The first cryptocurrency linked to a third-party asset (Realcoin) appeared in November 2014. The initiator of the startup was J. R. Willett, who two years earlier published an article The Second Bitcoin Whitepaper. It described the ideas and algorithms for developing such tokens. In 2015, Realcoin was renamed Tether (USDT).
There are 3 major types of stablecoins:
1. Crypto-backed stable coins.
2. Fiat-backed stablecoins.
3. Algorithmic stable coins.
Several stable coin mechanisms are used to achieve price stability:
Tokenization of fiat money. The price of the coin correlates with national currencies as 1:1. Each altcoin corresponds to one USD, EUR, JPY, etc., which are on the account of the issuing company.
Support the course with material values. The prices of stablecoins are provided by natural resources, precious metals, and so on.
Algorithmic stable cryptocurrencies. Here, the price of a coin is regulated through a change in the volume of money supply. To reduce the exchange rate, assets are issued, and to increase it, tokens are burned. The control is carried out automatically using smart contracts.
Support for other cryptocurrencies. The underlying asset is more stable and liquid coins. These are mostly BTC, ETH, or XRP.
Advantages and disadvantages of stablecoins
Of course, stablecoins have both advantages and disadvantages.
Pros of Stablecoins:
A larger volume of emissions. The organizer of the stablecoin issue can issue any number of tokens for which he has collateral. This is how stablecoins differ from conventional cryptocurrencies, the volume of issue of which is usually set in advance and is limited.
Resistance to manipulation of the course. The rate of stablecoins is subject to speculative effects to the same extent as the price of the underlying asset. The scheme of artificial appreciation of the cryptocurrency exchange rate is followed by a price collapse (Pump & Dump) if stablecoins do not work well.
The opportunity to invest in various assets. By purchasing stablecoins, an investor can diversify investments by purchasing "coins" linked to various underlying assets.
Cons of Stablecoins:
The possibility of manipulation by the issuing company. Stablecoins are issued and provided with assets by a certain company, and theoretically, there is a possibility of manipulation and fraudulent actions on its part.
Relatively low volatility. This characteristic can be both an advantage and a disadvantage of the "coin". Low volatility allows you to save investors' funds.
3 most popular stablecoins
Stablecoins have been positively received by the crypto community. These assets reduce transaction fees and allow us to ignore some of the banking restrictions. Traders have received a convenient tool for short trades and risk hedging. The success of the first stable cryptocurrency (Tether) led to other companies starting to develop similar projects.
The 3 most popular stable coins include Tether (USDT), USD Coin (USDC), and Dai (DAI). There are many stablecoins, and each stablecoin may have different features and mechanisms for maintaining stability.
According to CoinGecko, these 3 are clear leaders in adoption, market cap, and volume.
Tether (USDT)
Tether (USDT), which is issued by Tether Limited, is the largest and most popular stablecoin. Stablecoins are used by traders to move digital assets between exchanges, but they are also gradually taking root in consumer payments.
Tether Limited issues several stablecoins linked to the exchange rate of real assets - to the dollar (USDT), to the euro (EURT), to the yuan (CNHT) to the peso (MXNT), and an ounce of gold (XAUT). When saying "Tether stable coin", they mean exactly USDT.
How Tether works
Tether's stablecoin is linked to the dollar exchange rate because of the availability of Tether Limited's security system. It implies that each USDT token in circulation has an equivalent or greater value in its reserves. These reserves are a mixture of liquid assets, including both cash and short-term bonds and term deposits.
Tether's website regularly publishes reports describing the total number of USDT tokens in circulation and the reserves that the company has to ensure transparency and strengthen user trust. This practice is important for the company, taking into account the attention of regulators, primarily American ones.
The purchase, sale, and exchange of Tether stable coins are available on most cryptocurrency exchanges, p2p platforms, or exchange services. When an ordinary user buys USDT on an exchange or in an exchange, the amount of USDT in circulation does not change. However, if a large organization wants to convert a large amount of money directly into USDT, it will contact the company directly and transfer the money to its account in exchange for newly issued tokens. The transparency of the blockchain and the tracking of Tether's public addresses allow analytical services to see when and how many newly issued USDTs appear on the market.
Unlike many other cryptocurrencies, Tether does not run on its blockchain. Instead, the company uses the infrastructure of other existing blockchains to place tokens. This approach allows Tether to benefit from the security, speed, and capabilities of third-party platforms.
Currently, USDT tokens are available on several blockchains, including Ethereum, Tron, Solana or Polygon. Each blockchain offers unique transaction speeds, costs, and ecosystem benefits, providing users with various options for conducting transactions with USDT. TRC-20 standard USDT tokens operating on the Tron network are most popular among users because of the high speed and cheapness of transfers.
How Tether is used
Trading and investing. USDT is a favorite tool for traders who want to quickly and efficiently deposit funds on exchanges. It serves as an alternative to the dollar, but it does not have regional or banking restrictions. Its stable exchange rate ensures the safety of the deposit during periods of high volatility, allowing traders to store funds without leaving the cryptocurrency market.
Money transfers. Tether allows you to send money around the world quickly and often with lower fees than with traditional bank transfers. The recipient can convert USDT into local currency or use them directly.
Earning interest. Some crypto platforms and wallets offer deposit accounts for stablecoins. They can earn income on their funds, sometimes at rates higher than in banks, while maintaining the liquidity and stability of USDT.
Payment for goods and services. An increasing number of outlets accept cryptocurrencies, including Tether, as payment. This can be especially useful for international transactions, where traditional banking operations may be expensive or unavailable.
Participation in DeFi. Tether is widely used in decentralized finance (DeFi) for lending, loans, and earnings, using various protocols. Its stability makes it an attractive asset to participate in DeFi projects while reducing the risks inherent in cryptocurrencies with a volatile exchange rate. Learn more about DeFi Lending/Borrowing: Maximize your earning potential in crypto in our article.
USD Coin (USDC)
The announcement took place in May 2018, and in September USD Coin was fully launched. The project was developed jointly by Circle and Centre companies. Later, Bitmain, the manufacturer of ASIC equipment and the owner of the largest mining pool in the world, also contributed by investing $110 million to the development of the USDC.
Besides these companies, the project was funded by Tusk Ventures, General Catalyst, and Blockchain Capital funds. The American exchange Coinbase played an important role in the emergence and popularization of this stablecoin.
The prerequisite for the creation of a stablecoin was that there was no token then that would correspond to the stablecoins. There was a USDT, but it was criticized for not allowing an audit and not disclosing information about banking organizations with which the issuer cooperated.
With USD Coin, an audit was conducted in January 2019, which confirmed that the coins are provided with fiat currency - US dollars. There is no mining process in this project. The cryptocurrency is issued by the issuer.
The token is created by users based on sending them an equivalent amount of US dollars for the deposit. Information about this is entered into the smart contract.
How USD Coin works
Stablecoin USDC is released on several blockchains. The following networks are available:
Ethereum.
Tron.
Solana.
Algorand.
Stellar.
This allows you to choose a convenient option in terms of transaction speed and price. You can issue a coin in any of the blockchains.
Stablecoin is considered the most transparent asset in cryptocurrencies, as the issue process is fixed by a smart contract. The client sends US dollars to the specified account. Only after that, does the issuer issue an equivalent number of stablecoins.
The process of "defrosting" dollars occurs in reverse order. The USDC cryptocurrency is sent by the client to a smart contract. After that, he withdraws his US dollars from the account.
Issuers report on their cash reserves every month. This gives customers confidence that they will receive the fiat equivalent of stablecoins in the event of a reverse exchange. The stablecoins remain transparent; the cryptocurrency is backed by USD.
How USD Coin is used
USD Coins are suitable for online and offline purchases. The USD Coin cryptocurrency is also used as a risk-hedging tool. Because of the reduced volatility, the token is suitable for situations of market uncertainty with large fluctuations in the exchange rate.
Coin issue. Circle company is responsible for this. After registering on the platform, the client creates a coin based on one of the proposed blockchain networks. To do this, a certain amount of USD is reserved in the smart contract.
Provision. The collateral is US dollars. The collateral is kept on deposits. Reserves are confirmed by regular audits.
Methods of obtaining. There is no mining or stacking in the project. You can get tokens either by issuing them or by buying them on exchanges or exchanges.
Issue. Everyone can convert their dollars into USD Coin through accounts on the Circle or Coinbase website.
Exchanges and exchangers. You can get tokens by buying them at various sites. You need to register, top up your account, and select a currency pair.
Where to store cryptocurrency. Tokens of this issuer are stored on wallets. For example, if a USDC coin is created on the Ethereum blockchain, software that supports the ERC-20 standard will be suitable for storing it.
MakerDAO (DAI)
The MakerDAO platform appeared in 2014, and the stable coin appeared on December 18, 2017. The CEO of the project was one founder of MakerDAO Rune Christensen. The token was released on the Ethereum blockchain. The price was around $1 although ETH dropped by almost 80%.
In September 2018, Andreessen Horowitz invested $15 million in the MakerDAO project, buying 6% of all MKR (platform tokens) in circulation. The controversy surrounding the prospects for greater integration of the DAI cryptocurrency led to the fact that the CEO of the company left the team in 2019.
Neither mining nor stacking is available within the framework of the project. New coins are issued by the users themselves. The initial offer contradicts the essence of this stablecoin, which is why the project didn't even have an ICO.
The uniqueness of this token is that it is completely decentralized. Its release does not depend on the decision of a particular company. The emission is not limited by anyone, but it is constantly backed up by an equivalent amount of ETH. Unlike most stablecoins, DAI is a decentralized and stable currency that is backed by Ethereum coins frozen in a smart contract. The token can be used for payments or transfer of funds. The unused part of the coins is burned. This, according to the developers, leads to a stabilization of the exchange rate because of the continued balance of supply and demand.
How MakerDAO works
Users create DAI coins on the Ethereum blockchain. You can read about the history of ETH: The rise of the Ethereum blockchain here.
A smart contract is created on the MakerDAO platform, where Ethereum deposits are converted to PATH (Pooled ETH). The latter are no different from the classic ether. This name is used for technical purposes.
After freezing the PATH, the user releases altcoins. They are used either for conversion into other cryptocurrencies or for purchases in stores that accept virtual money.
A fee of 0.5% of the total amount issued by the user is provided for coin issuance services. It is paid for the MKR cryptocurrency (MakerDAO platform). All unused tokens can be exchanged back to ETH. According to the terms of the smart contract, they are burned.
The peculiarity of this stable cryptocurrency is risk indicators. If they are reached, the position will be closed forcibly. There are also several other characteristics:
1. The debt ceiling. The maximum amount that can be created by a certain type of collateral position.
2. Liquidation coefficient. This is the risk threshold. It is determined by the vote of MKR users and can reach 150%.
3. Penalties for the liquidation of a smart contract. If the coefficient is reached, the position is automatically closed, and its issuer pays an additional penalty of 13%.
How MakerDAO is used
MakerDAO stablecoin can be used in various fields. Given its low volatility, it has a great advantage over existing cryptocurrencies. Therefore, the scope of the coin is not limited to the transfer between two people. They used it to buy goods or services and also use the asset as less risky during a period of significant fluctuations in the cryptocurrency market.
Trading or investing in this stablecoin is practically meaningless since the price of the token always is small. In case of serious deviations, protective mechanisms are activated that return quotes to balance. The only option is high-frequency trading with large volumes to make a profit on minor price fluctuations.
Why stablecoins are growing in popularity?
Stablecoins backed by fiat currency have become an integral part of the blockchain financial ecosystem, guaranteeing stability and liquidity for users. Despite the name, such assets do not always remain stable. This opens up significant opportunities for arbitration. This is especially true for coins linked to the value of the euro.
One of the key indicators of the growth and adoption of stablecoins was the volume of their issuance. However, with the adoption of MiCA regulations in Europe, the future of these coins may become unpredictable. Experts believe that the dynamics of their circulating supply can change depending on market conditions and regulatory actions.
According to experts, it is also necessary to track the number and volume of stablecoin transfers, as they reflect the actual use of these assets for various purposes - from transactions on decentralized platforms (DeFi) to trading on centralized exchanges. High figures with a low number of active users may indicate an artificial overestimation of volumes or overestimation. Thus, stablecoins have become an important element of the blockchain infrastructure, providing stability and liquidity for traders.
Conclusion
Stablecoins are a promising asset, as they create a bridge between the world of cryptocurrencies and real money. There are stablecoins, the benefits of which are great for the entire crypto market. They are convenient for conducting trading operations and profit-making. They also have the advantages of fiat and are exchanged practically on exchanges where the corresponding tokens are presented.
Stablecoins are growing in popularity and it is common to buy and hold stablecoins today. Remember, as with any form of cryptocurrency, it's essential to do your research before committing funds and making a trade.
