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USDT vs DAI: What is the Difference?

Welcome to this post, where we are going to see the main differences between USDT and USDC, and which is the best option.

To do this, we will highlight the most important information of each cryptocurrency separately, such as their risks and advantages. The most important thing in a stablecoin, as it is in these two cases, is that it maintains its price equivalent to $1 and there are guarantees that it will maintain this value.

The last thing you want when using a stablecoin is that it does not maintain its value and does not have enough cash to maintain this value. Since, each stablecoin must be backed by 1$ or some liquid financial asset, to give security to users to use that stablecoin instead of another. Therefore, let’s go over those aspects to look at, and to take into account in each one of them.

USDT

USDT or Tether is the top stablecoin with ranking 3 in market capitalization and most used at the moment. It is only recently, that strong competitors have started to appear in the top 10 being a stablecoin like USDC, but a year ago, USDT had a great dominance over the other stablecoins out there.

The company behind USDT is Tether Limited and that was long linked to Bitfinex, one of the leading cryptocurrency exchanges. The company is based in Hong Kong, and therefore does not have so many regulatory requirements as it is not in a country like the United States or European countries. We will discuss the aspects related to USDT and Bitfinex later on.

Treasury

USDT’s treasury can be found on their website, at transparency. Here you can find all the information, and external audits on their balance sheets, the amount of USDT circulating and the amount of reserves they have. 84.25% is cash and cash equivalents and other short-term deposits and commercial paper, 5.22% in corporate bonds, funds and precious metals, 4.99% in secured loans and 5.54% in other investments.

Regarding the 84.25% of cash and cash equivalents, we have 52.51% in commercial paper, 33.35% in treasury bills, 12.42% in cash and bank deposits and 1.72% in money market funds.

You can find the balance in each network of its stablecoins, in addition to USDT, EURT, CNHT and XAUT. The % that have been commented is at the time of writing this article and may vary, so I recommend you also consult that section to learn more in detail the treasury that backs USDT.

USDT Supply

Another relevant aspect is the growth of the USDT supply, where we can see the market capitalization to know how many USDT are in circulation. If there are 78 billion (American), it means that there must be support for those 78 billion USDT in circulation. What is interesting is to see the market capitalization and its evolution, to see if it has a very fast growth and there is a large supply of USDT, to see if there is backing or they have just created more USDT without a real backing. So seeing if there is an increase in their supply is also a factor to look at.

Advantages

Let’s take a look at the main advantages it can present and the risks USDT has as stablecoins if we can compare it with others, so you can get a better idea of its strengths and weaknesses. Starting with the good.

One of its main advantages is that it has been around since 2014, and is still the leader in the stablecoins market. Being used in all centralized exchanges to buy other cryptocurrencies. So it has a great importance in the entire cryptocurrency market, both in liquidity and in its use in different functions, either centrally in exchanges or decentralized.

Another positive aspect is the great liquidity that you find in many different networks, being the stablecoin that is available in more networks and you will be able to use.

For the time being, despite having many news and doubts that we will now comment, it has not failed and has continued to grow its USDT offer and use throughout the world of cryptocurrencies, despite raising many doubts. So, historically, it has more run than any other stablecoin, and with a volume of daily and total use, much higher. Which is also an advantage, knowing how to keep its price linked to the dollar with so much market capitalization, and so much liquidity of the token spread across different networks and platforms.

Risks

Let’s go with the aspects that pose a risk to USDT and that may create certain doubts in using this stablecoin with respect to others.

The first is the controversial case of bitfinex and USDT, where there are many accusations that USDT was created out of nothing to cover a hole in the Bitfinex Exchange, and that USDT was used to inflate the price of Bitcoin. We won’t go into too much detail, but if you have more interest, I recommend watching news regarding this topic.

The other negative aspect is the lack of transparency. Despite being audited, being a company in a country with few regulatory requirements, there are many doubts about the company that has audited tether and if they really have the support they claim to have. Since they have not authorized U.S. government entities to review it or use another auditing company, and this creates several doubts as to whether the support is real.

Regarding the backing, a large part is in promissory notes or commercial paper, and this raises doubts because it is not known which companies have the promissory notes or commercial paper backing USDT as part of the treasury. And IOUs or commercial paper account for 44.5% of the total reserves held by tether.

Another disadvantage that we have been able to see in some of the sharp falls, is that it does not hold the peg or its equivalent value to the dollar as perhaps other stablecoins. Seeing USDT with a price of 0.95 at the lowest moments, although later with a great fast recovery. Although it is at times of high volume and very large drops, the fact that it falls as much as 4-5% and other stablecoins hold up better is also a risk to consider if there are again sharp drops and if USDT will be able to maintain its peg to the dollar.

DAI

DAI is one of the oldest stablecoins and still remain among the most used by the community behind. With its first appearance in 2018, and bringing a different stablecoin model, with an algorithmic stablecoin and over-collateralization in a completely transparent way and without a company behind it. Although in this last year it has been losing strength compared to other stablecoins that have appeared, it has continued to grow and be one of the main and most used stablecoins.

MakerDAO is the protocol behind Dai and the community that is responsible for running DAI and keeping its value tied to the dollar. Like many DEFI protocols, there is no single company or individuals behind it, but it is a community that by voting approves new changes to possible problems that Dai may present or aspects related to the stablecoin, which is the core of the protocol.

As it is a stablecoin without a company behind it, and has kept its value linked to 1 dollar since its inception, it has led many people to use Dai instead of other stablecoins with companies behind them and less transparent.

Treasury

One of the great advantages over USDT or USDC, is that DAI we can see at all times and in real time the reserves it has, and the different distribution of collateral that DAI has to keep its value at 1 dollar always.

DAI is an overcollateralized algorithmic stablecoin. What this means is that there is more money locked up in its treasury than DAI in circulation. This allows it to regulate its price in the event of large drops in the market or any particular asset. At the moment, DAI is 177% overcollateralized, so there is 77% more value in its reserves than DAI outstanding.

If you want to see DAI’s reserves, you can go to daistats.com, and you can see all the data we discussed. Here, we can see how DAI’s collateral is distributed among different cryptocurrencies. This may vary, but usually remains very similar %.

We find as collateral USDC with 51.7%, Ethereum with 22.7%, WBTC WITH 9.6%, USDP with 5%, GUNIV3DAIUSDC2 with 2.7% and others with 5.7%. This is the current split at the time of writing this post, where more than 50% is USDC, another stablecoin.

In addition, we find that they have in total value $17.86 billion(USD) in reserves and $11.67 billion (USD) of IADs outstanding. This refers to the 177% of overcollateral that DAI has to keep its price pegged to the dollar. In the commented page, you can see more in depth data about DAI and all the collateral behind it, if you want to know more details.

DAI Supply

Another relevant aspect is the growth in the supply of DAI, where we can look at the market capitalization to see how many DAI are in circulation. If there are 11 billion (American), it means that there must be support for those 11 billion DAI in circulation. What is interesting is to see the market capitalization and its evolution, to see if it has a very fast growth and there is a large supply of DAI, to see if there is backing or they have simply created more IADs without real backing.

So, to see if there is an increase in their supply is also a factor to see, always checking that they have also increased the reserves. In this case, since it is in public form and can be viewed at any time, it is very easy to compare and verify that, if the amount of IADs in circulation increases, their reserves have also increased.

Advantages

Let’s take a look at the main advantages that DAI as stablecoins can present and the risks it has, so you can get a better idea of its strengths and weaknesses. Starting with the good.

The main advantage of DAI is the transparency it has. Being an algorithmic and community-based stablecoin, all data is public and you can be assured at all times of the information and transparency of the project.

The use of the Ethereum network, makes DAI mainly in the most decentralized network and with less risk to possible manipulations. In addition to a large community and a very good regulation model of its price.

The overcollateralization gives DAI a lot of leeway in case an asset falls a lot in value, by having different cryptocurrencies in its treasury and from the sharing of its reserves. With more than 50% extra, which gives a lot of security, even if the cryptocurrency market falls, that it can maintain its value.

Risks

Let’s go with the aspects that pose a risk for DAI and that may create certain doubts in using this stablecoin with respect to others.

The main risk and main reason why DAI has been losing market compared to other algorithmic stablecoins such as UST, is because of its dependence on USDC, another regulated stablecoin and with a company behind it, which is coinbase.

The main advantage DAI had was being a stablecoin without a company or control behind it, and thus being accessible to anyone. But with 50% of its cryptocurrency being based on another stablecoin such as USDC, which does have a company behind it, it loses all the meaning and reason why it was created in the beginning. For this reason, many people have stopped using DAI, as it is almost the same thing to use USDC, since it is 50% of this stablecoin.

Although USDC is regulated and is a way to ensure that DAI has good collateral behind it, it is too high an amount to have more than half of its reserves. When it would be better to mitigate risks a more equal distribution between different cryptocurrencies. Since, fortunately, USDC is very well supervised and controlled, having an American company behind it, but if any problem happens with USDC, it is also going to affect DAI.

In the same way that happened with USDC and USDT, at times of big drops, we have been able to see DAI at 0.96, albeit with a quick recovery afterwards. While this happens in most or all stablecoins at times of large market declines, they should be able to withstand even large declines and not have 4% declines, albeit for a very short time. On the other side, we have seen big drops, but there can always be an even bigger drop, and it will have to be seen if DAI can really hold its value with the dollar.

Summary

Finally, let’s summarize the strengths and weaknesses of each one so that you can choose. Keep in mind that, in a stablecoin, what matters most and is most relevant is that it maintains its price at 1$, and that it has treasury in case something happens, to be able to recover your USDT or DAI in dollars.

The main difference is a stablecoin with a company behind it such as USDT, with not very transparent reserves, but with more experience and years than any other stablecoin.

DAI, on the other hand, is a transparent stablecoin, although it is highly dependent on another stablecoin, USDC, for its reserves. DAI is an algorithmic stablecoin without a company behind it, but a community and was the first algorithmic stablecoin that has lasted more years and with a large number of users who continue to use it.

I hope it has helped you to know in more detail how USDT and DAI work and all the support and information behind each one. Remember that if you don’t have an account with binance, you can create one just below.

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