Tether and Dai are two prominent stablecoins. Each has its benefits and challenges.
Tether used to claim that every coin was backed by USD in their bank. No-one believed them and it was suspected that they ran a fractional reserve and used the free capital to make money on Bitfinex. After the farce of several failed audits Tether now claims (my bold),
Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”). Every tether is also 1-to-1 pegged to the dollar, so 1 USD₮ is always valued by Tether at 1 USD.
Which some may take as an admission that they have been funding Bitfinex and if they spend it all on fruit and flowers then coin holders will lose out.
None of this seems to dissuade users from buying Tether though and it has the 8th largest market cap. Tether’s reach is growing because today it announced a deal with the Tron blockchain that will enable Tron users to hold Tether.
Dai is a stablecoin offered by the Maker organisation (DAO). Maker DAO helps users who want to get a loan using their existing crypto as collateral. A user deposits Ethereum in a smart contract and gets Dai which are nominally 1 USD. They pay interest on the loan until they repay the Dai. They can spend the Dai on exchanges to buy other crypto assets or even fiat. Dia are minted when people take loans and destroyed when they replay them.
If Tether is the bad boy smoking behind the bike sheds who get all the girls then Dai is the math geek. The Maker team tries to hold the value of Dai at 1 USD by balancing supply and demand. A quick glance at the chart shows that they are not very good at it.
Dai is ranked 67 by market cap.
The stablecoin user risks being strung along by Tether or suffering the instability of the “stablecoin” Dia. At the moment the best choice may be TUSD which is an asset-backed stablecoin which was set up to offer a more trustworthy alternative to Tether.
There are many flaws with our banking system but on the whole it works well. It is believed that Western economies can improve efficiency by 2% per year and we see that in GDP growth. It is reasonable to believe that asset-backed stablecoins like TUSD will do the job that investors require and do it well.
That’s not why I went into blockchain. The independence of central banks is being threatened by populist politicians. Therefore, decentralised services like Maker DAO which are censorship resistant offer an important alternative to conventional finance.