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Stablecoins are a cryptocurrency that maintain value on par with a nation's fiat currency. Most commonly, stablecoins are pegged to the value of the U.S. dollar.
Some stablecoins tie themselves to the yen, euro, pound, gold and other assets to help users experience decentralized finance (DeFi) applications while reducing the volatility of cryptocurrencies.
The failure of Terra (Luna), a stablecoin that ranked in the top ten by market capitalization, brought panic to the whole stablecoin market. Terra (Luna) collapsed after its stablecoin lost its peg to $1.
A number of factors can depeg a stablecoin; in Terra’s case, it was a panicked market paired with a rush to liquidity. After Terra (Luna) lost the majority of its value, the level of security that the remaining stablecoins hold has become a concern.
Ten of the top 100 most valuable cryptocurrencies are stablecoins; a rush to liquidity in this sector of the market could bring fear to the wider crypto market. Two of the popular stablecoins that remain, Tether (USDT) and DAI, have experienced volatile movement in response to the Terra UST depeg.
USDT is backed by a company called Tether that operates in the Caribbean Islands. The USDT coin is the most valuable stablecoin by market cap.
DAI represents an Ethereum-backed stablecoin, which is operated by the MakerDAO rather than a corporation.
Luna's failure has presented a case that markets do not need experimental stablecoins. The final showdown could very well come down to Tether and DAI.
What Is a Stablecoin?
Of the two important types of stablecoins, one uses an algorithm to tie it to a fiat currency. The other type uses assets to back the stablecoin. In this example, both DAI and USDT collaterize stablecoins, with a caveat that DAI is decentralized and USDT is centralized.
The difference between a real U.S. dollar and a U.S. dollar stablecoin may still not be clear to those new to this concept. The most basic difference is that a fiat U.S. dollar is held by a bank, while a stablecoin is held by you and your individual wallet.
Along with cutting the bank out of your transactions, stablecoins provide a large number of uses that normal fiat money cannot.
Why Do People Use Stablecoins?
People use stablecoins to stabilize the volatility of their cryptocurrency investments while using the advantages a blockchains bring. Both USDT and DAI allow you to interact with different decentralized applications (DApps). Exploring Web3 features while keeping your currency in the much-less-volatile dollar is beneficial to many.
What Is Tether (USDT)?
Tether, the company backing USDT, has claimed to back their stablecoin dollar for dollar. If a rush to liquidity were to occur, everyone would be able to cash out if needed.
Tether is the most valuable stablecoin by market cap; throughout the entire crypto market it is only behind Bitcoin and Ethereum in value. Still, as seen by Terra (Luna), even stablecoins aren’t without some degree of risk.
Questions on whether or not Tether could truly cash out such a liquidity rush have been displayed in market volatility.
Tether backs its USDT stablecoin with dollars, collateralized debt and physical assets. The total amount of public information on Tether’s backing is limited.
As the U.S. increases regulation, Tether may be affected; it is already banned in New York.
Tether’s impressive valuation could drop quickly if the company continues to withhold information on the backing of its stablecoin or is banned by more U.S. states.
Features of Tether (USDT)
Tether allows users to interact with DeFi, DApps and non-fungible tokens (NFTs) while maintaining the stable value of the U.S. dollar. Those new to the crypto space may think of digital assets largely as a risky class of investments, but with the use of Tether, the many aspects of Web3 can be accessed in a way that reduces volatile price movements.
How to Buy Tether (USDT)
Sum of median estimated savings and rewards earned, per user in 2021 across multiple Coinbase programs (excluding sweepstakes). This amount includes fee waivers from Coinbase One (excluding the subscription cost), rewards from Coinbase Card, and staking rewards. ³Crypto rewards is an optional Coinbase offer. Upon purchase of USDC, you will be automatically opted in to rewards. If you’d like to opt out or learn more about rewards, you can click here. The rewards rate is subject to change and can vary by region. Customers will be able to see the latest applicable rates directly within their accounts.
Tether is offered on a number of trading platforms including Binance, Coinbase and FTX. The coin is also popular on decentralized exchanges such as Uniswap.
What is DAI?
DAI is a stablecoin that is backed by Ethereum and USDC, which the MakerDAO collaboratively invests in. By backing the DAI stable coin – at a minimum of 1.5x – you receive DAI in return, while your Ether is staked and earns yield.
The DAO uses the Maker (MKR) token to govern its liquidity pool, and it aims to become increasingly decentralized. The DAO is operated on a permissionless blockchain, which is a far throw from being operated by a secretive company in the Cayman Islands like Tether.
The structure behind DAI differs from Tether. This stablecoin structure’s staying power is yet to be determined.
Features of DAI
DAI provides many of the same features as Tether. The coin is soft pegged to the U.S. dollar and operates primarily on Ethereum’s blockchain. DAI is operated by a decentralized autonomous organization (DAO), which makes it much more attractive to crypto enthusiasts. Crypto revolves around decentralization, and a DAO-backed stablecoin more clearly embodies these values than one backed by a corporation.
How to Buy DAI
Sum of median estimated savings and rewards earned, per user in 2021 across multiple Coinbase programs (excluding sweepstakes). This amount includes fee waivers from Coinbase One (excluding the subscription cost), rewards from Coinbase Card, and staking rewards. ³Crypto rewards is an optional Coinbase offer. Upon purchase of USDC, you will be automatically opted in to rewards. If you’d like to opt out or learn more about rewards, you can click here. The rewards rate is subject to change and can vary by region. Customers will be able to see the latest applicable rates directly within their accounts.
DAI is offered on Coinbase Global Inc. (NASDAQ: COIN), Binance and many decentralized exchanges including Uniswap. To operate the many features of DAI, a non-custodial wallet is recommended.
Should I use Tether (USDT) or DAI Stablecoin?
With the two stablecoins having similar functions, selection over which to use should be largely based over which you feel safest with: Tether, which is collateralized with physical assets, or DAI, which uses new crypto technology via Ethereum and a DAO governance structure.
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