USDC vs. DAI: Which Is the Safer Stablecoin?
Filip Dimkovskion July 20, 2022.
Cryptocurrencies have surged in popularity over the last few years, including several stablecoins. In fact, big & prominent stablecoin projects like USDC, USDT, and DAI frequently have a bigger trading volume than Bitcoin and Ethereum.
There are many reasons stablecoins have risen in popularity, but the two biggest ones are their consistent price and cheap transaction costs. Unlike cryptos like Bitcoin and Ethereum, stablecoins have a much less volatile nature. They have more or less been able to hold their peg perfectly, with rare exceptions of fraudulent projects like TerraLuna.
In addition to USD Tether (USDT), some of the biggest stablecoins in the cryptocurrency space are USD Coin (USDC) and DAI. Both of these cryptos have their value pegged to the US Dollar in a 1:1 ratio, though the way they work differs. So, how do USDC and DAI differ? Read to find out.
What Is USDC?
USDC is a cryptocurrency asset developed by Circle, and the coin is pegged 1:1 with the US dollar, being backed by physical USD assets held in its reserve vaults. As long as there are US Dollars held in the reserve vaults, one USDC token will be worth exactly one USD. All USDC tokens are issued by regulated financial institutions like The New York Community Bank and BNY Mellon - one of the oldest and largest banks in the US. Moreover, USDC is incredibly transparent, as its transactions are recorded on a public blockchain.
Getting into how USDC works, it’s worth mentioning that the creation and redemption of USDC tokens are managed by regulated financial institutions. As we said before, the transactions are transparently recorded on a public blockchain ledger.
So, why should someone use USDC if they can use the US Dollar? It’s simple - the goal of USDC is to provide a much more efficient and convenient way to store, send, and receive digital US Dollars. Because USDC is built on the same open-source standards as other major cryptos, it is easy to integrate into existing crypto wallets and exchanges. USDC is also widely used in many yield farming strategies, as it's one of the most popular stablecoins in the crypto market.
It’s worth mentioning that USDC can be used to pay for goods and services online or converted back into physical USD cash. Thanks to the reasons above, as well as the recent audit USDC received, the token has quickly become one of the most popular stablecoins in the cryptocurrency market.
What Is DAI?
DAI is a stablecoin that is backed by Ethereum and works on the Ethereum blockchain through smart contracts. Unlike other coins that are regulated by companies, DAI is unique in that it’s the first coin that is completely decentralized and has no central authority. This allows for DAI to be used anywhere in the world without the need for a third party.
However, DAI does not keep its $1 peg through physical cash - instead, its value is stabilized by smart contracts, loans, and algorithms. Keep in mind that DAI is not an algorithmic stablecoin like the Ampleforth stablecoins, as it relies more on collateralized debt than an algorithm. Thus, as a result, DAI can be used as a stable store of value or as a unit of account. Thanks to its unique approach, DAI provides a new and easy way to pay with crypto that is both secure and convenient.
So, we now know that DAI does not have physical cash backing it, but just like USDC, it is a decentralized stablecoin that is indirectly pegged to the US dollar. However, the question arises, how does DAI maintain its $1 price if there are no dollars behind it?
Unlike USDC, which is backed by physical reserves, DAI is backed by collateralized debt positions (CDPs) on blockchain protocols. When you open a CDP, you deposit Ethereum as collateral and receive DAI in return. You can then use DAI to trade or hold it as a stable store of value or use it for stablecoin yield farming.
Key Similarities Between USDC and DAI
There are many similarities between USDC and DAI, as they only differ in the way their price is regulated. USDC and DAI are both digital tokens that are pegged to the value of the US dollar. USDC is issued by Circle and backed by Goldman Sachs, while DAI is issued by MakerDao and backed by a variety of collateralized assets and complex algorithms. Both tokens can be used to make payments and transfers, and they can also be traded on cryptocurrency exchanges.
Key Differences Between USDC and DAI
One key difference between the two tokens is that USDC is a semi-centralized token, while DAI is a fully decentralized one. This means that USDC is actually controlled by the entity issuing it, while DAI is controlled by a network of decentralized lenders. As a result, DAI is more resistant to price swings and manipulation than USDC.
Another key difference is that USDC can be redeemed for US dollars at its issuing institution, while DAI cannot. This makes USDC more liquid than DAI, which can only be redeemed for other collateralized assets like Ethereum. Overall, USDC and DAI are both stablecoins that have their own strengths and weaknesses - they just differ in the way their price is regulated.
Is USDC Safer Than DAI?
As we mentioned before, USDC is a stablecoin that is backed by the US dollar. This means that each USDC token is worth exactly one dollar, and as long as there are dollars held in reserve, the price will keep its 1:1 ratio. This stability makes USDC a very attractive choice for people who want to avoid volatility.
However, USDC does have some drawbacks. One major disadvantage is that it is subject to inflation. This means that over time, each USDC coin will be worth less and less, as it will follow the inflation of the US Dollar.
DAI is also a stablecoin, but it is not backed by any fiat currency. Instead, DAI is backed by Ethereum. This, unfortunately, results in DAI being slightly more volatile than USDC. However, this volatility can also be seen as an advantage, as it gives investors the opportunity to profit from the minimal price swings. Moreover, DAI is available on more exchanges than USDC, making it easier to buy and sell DAI when you want to.
Overall, USDC is a more stable token than DAI, as DAI’s price can occasionally fluctuate in relation to Ethereum. However, DAI is more widely available and can be more profitable in the long run.