Volatility is one of the main issues with using crypto for payments. Stablecoins were introduced to address this issue. They were also created to harness the speed of digital transactions while maintaining the stability of the US dollar. USDT and USDC are the most popular stablecoins currently on the market. Both of these stablecoins are backed by the US dollar. The inception of the DAI stablecoin is trying to disrupt the landscape by holding its reserves in other cryptos. This article will examine DAI and USDT to decide which is a better investment.

What is DAI?

DAI is a stablecoin powered by the Ethereum blockchain. MakerDAO controls the development and minting of this stablecoin. DAI is backed by several crypto tokens to maintain its peg to the dollar. A collection of crypto is locked into a smart contract as collateral every time a new DAI is minted.

Users must submit at least 150% of DAI’s value as collateral in other crypto tokens to obtain it. Usually, traders keep 300–400% of their value as collateral in other crypto tokens due to market volatility. Invested crypto tokens will be sold if they can not meet the required amount of collateral.

What is USDT?

USDT is one of the first stablecoins in the crypto market. It was introduced to protect users from the volatility of the crypto market. Unlike DAI, USDT is backed by a one-to-one reserve of the US dollar. You can instantly convert the stablecoin into US dollars.

A company based in Hong Kong called Tether issues USDT. Tether reserves are managed by a group of financial institutions. To ensure transparency, these reserves are regularly audited.

Key features of DAI

Decentralized governance

Maker Protocol is a smart contract that powers the DAI ecosystem. This protocol is developed and governed by the MakerDAO. MKR is the native token of the DAO. Owning MKR gives you the right to vote on key initiatives of the protocol.

Financial freedom

DAI can be generated whenever you want it. You can borrow the stablecoin from the network for transactions as long as you meet the collateral threshold. This feature provides stability in crypto transactions while giving you the freedom to use the digital medium.

Income generation

Users can earn rewards for locking their DAI in smart contracts using the DAI savings rate system. Based on the current savings rate, DAI tokens are added to the smart contract. This process is similar to crypto staking. It gives users an avenue for passive income and to also participate in the governance of the platform.

Key features of USDT

Time in the market

Tether has been in the stablecoin market through USDT since 2014. They have proved the safety and effectiveness of USDT over the past few years. It has a good track record of sticking to $1 per coin.

Convertibility

It is easy for users to convert USDT to fiat money since it is backed one-to-one by US dollars. This feature makes it easier for businesses to accept payments in USDT.

Low fees

There is no fee when transacting in USDT. Only a small fee applies when crypto tokens are converted to US dollars.

Advantages and disadvantages of DAI

Advantages

• DAI is decentralized by nature.
• You can earn interest by locking in your DAI in a smart contract.
• Due to decentralized protocols, DAI can not only be bought but also generated.

Disadvantages

• Borrowers of DAI can be exposed to the volatility of the crypto market.
• DAI has a smaller market cap compared to other popular stablecoins.
• Users keep at least 150% of the borrowed amount as collateral.

Advantages and disadvantages of USDT

Advantages

• USDT is the oldest and most trusted stablecoin on the market.
• Users can easily convert their USDT tokens to fiat currency.
• Since its inception, the value of the USDT has consistently managed to stay close to $1.

Disadvantages

• USDT is not decentralized as it is controlled by a single entity, Tether.
• The 1:1 ratio of Tether reserves has been debated multiple times.
• Users cannot be anonymous because they have to make bank deposits to receive USDT tokens.

How safe is DAI?

Most loans on the DAI platform are overcollateralized, but some users may only invest the minimum amount of collateral. In such scenarios, wild market swings can affect those that borrow too much from the platform.

However, there is no credit risk as there is no individual lender. Users who fail to pay do not impact other users on the network. Additionally, DAI has maintained its peg to the dollar without many deviations.

How safe is USDT?

Currently, USDT is the most popular and dominant stablecoin on the market.This stablecoin has the highest market capitalization of all stablecoins. USDT is also one of the most widely used stablecoins in the industry. However, there is considerable credit risk because it is backed by fiat currency.

The fees for this network are low. USDT is easy to acquire and convert back to US dollars.

The verdict

So, is DAI a good investment? DAI is an appealing alternative to the stablecoins dominating the market today. It allows users to commit their ETH as collateral and use DAI without worrying about constant market shifts. However, the market capitalization of Tether is ten times greater than that of DAI. This difference in market cap is because of regular auditing and easy convertibility in Tether.

DAI is a safe choice if you have sizable holdings in ETH. However, Tether has been the default choice for transactions in the industry for a good period. Tether is the best option for those who want to make simple transactions with low fees.

FAQs

Is DAI backed by USDT?

No, DAI is not backed by USDT. DAI is an Ethereum-backed stablecoin. Multiple cryptos are backing USDT.

Is DAI a stablecoin?

Yes, DAI is an Ethereum-based stablecoin with reserves in other cryptos. MakerDAO controls the minting and development of DAI. A set of crypto assets is locked in a smart contract as collateral every time a new DAI is minted.

Is DAI safer than USDT?

Both USDT and DAI are reputed stablecoins. Tether is backed by a single entity, while DAI operates in a decentralized manner. But Tether is backed by a stable fiat currency, whereas DAI is backed by crypto. Choosing between the two depends on your trust in the protocols they are governed by.

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