As decentralized finance (DeFi) is growing soo rapidly there is also a thing that is growing at the same speed, which is the confusion between the investors and crypto enthusiast regarding what is Defi? what is a stablecoin? what is the difference between DAI, USDT, and USDC?
This blog will tell you about the fundamentals of DeFi, compare these three stablecoins in their backing and mechanisms for stability and use cases alike, so that you have enough knowledge to make informed decisions in a complex system where it’s easy to get lost we can help trust me! It will facilitate your ability to harness DeFi and stablecoins.
What is DeFi?
DeFi is a term given to financial services that have no central authority or someone in charge. Using decentralized money, like certain cryptocurrencies, that can also be programmed for automated activities, we can build exchanges, lending services, insurance companies, and other organizations that don’t have any owner and aren’t controlled by anyone.
What Are DeFi Components?
In order to create a decentralized financial system, the first thing we need is an infrastructure for programming and running decentralized services. Luckily for us, Ethereum does just that. Ethereum is a Do It Yourself platform for writing decentralized programs also known as decentralized apps or Dapps.
Through the use of Ethereum we can write automated code, also known as smart contracts, that manage any financial service we’d like to create in a decentralized manner. This means that we determine the rules as to how a certain service will work, and once we deploy those rules on the Ethereum network we no longer have control over them – they are immutable.
Once we have a system in place like Ethereum for creating decentralized apps we can start building our decentralized financial system. Now let’s take a look at some of the building blocks that comprise it:
- The first thing needed is the financial capital which is the most important component. But why not use Bitcoin or Ether, which is Ethereum’s currency? Well, as for Bitcoin, while it is indeed decentralized, it has only very basic programmable functionality and is not compatible with the Ethereum platform. Ether, on the other hand, is compatible and programmable, however, it is also highly volatile.
- If we’re looking to build reliable financial services that people will want to use we’ll need a more stable currency to operate within this system. This is where stablecoins come in. Stablecoins are cryptocurrencies that are pegged to the value of a real-world asset, usually some major currency like the US dollar.
What are Stable Coins?
Stablecoins are cryptocurrencies that are pegged to the value of a real-world asset, usually some major currency like the US dollar. For the purpose of DeFi, we’ll want to use a stablecoin that doesn’t use fiat money reserves for maintaining a peg since this will require some central authority. The crypto ecosystem cannot do without stablecoins. Stability, usability, and lubricity is the soul of stable money.
They make transactions smooth, and financial applications. Chain finance They help connect traditional finance with decentralized Keeping a foothold in 2022, with transactions worth $7 trillion and high expectations for the credit card networks, meant stablecoins are at a fork Tally sticks Tongue-in plays an Emerging market industrial (up mute modern) To provide a stable value for investment and a reliable way of moving assets on top of blockchains means that stablecoins have become an essential feature in the crypto landscape.Stablecoins will play a more and more important role as the future evolves.
Stable Coins there are primarily three types of stablecoins:
- fiat-collateralized
- Crypto-collateralized
- Non-collateralized (algorithmic)
What Are DAI Stablecoins?
DAI is a decentralized cryptocurrency pegged against the value of the US dollar, meaning one DAI equals one US dollar. Unlike other popular stablecoins whose value is backed directly by US Dollar reserves, DAI is backed by crypto collaterals that can be viewed publicly on the Ethereum blockchain.
DAI is over-collateralized, meaning if you lock up in a deposit of $1 worth of Ether, you can borrow 66 cents worth of DAI. As soon as you want your Ether back, just pay back the DAI you borrowed and the Ether will be released. If you don’t have any Ether to lock up as collateral you can just buy DAI on an exchange. Because DAI is over-collateralized, even if Ether’s price becomes extremely volatile, the value of the locked Ether backing the DAI in circulation will most likely still remain at 100% or more.
In essence, the DAI stablecoin is actually also a smart contract that resides on the Ethereum platform. This makes DAI a truly trustless and decentralized stablecoin that cannot be shut down nor censored, hence it’s a perfect form of money for other DeFi services.
Difference Between DAI, USDT, and USDC Stablecoins
| Feature | DAI | USDT | USDC |
| Collateral | Over-collateralized by cryptocurrencies like Ether | Backed by physical US dollar reserves | Backed by physical US dollar reserves |
| Stability Mechanism | Algorithmic stability mechanism on Maker Protocol | Centralized peg to US dollar | Centralized peg to US dollar |
| Transparency | Transparent minting process governed by Maker DAO community | Faced scrutiny over reserve backing transparency | Known for regular attestations from auditors |
| Regulation | Not subject to the same regulatory oversight as centralized stablecoins | Subject to regulatory compliance and audits | Subject to regulatory compliance and audits |
| Adoption | Primarily used within the decentralized finance (DeFi) ecosystem | Broader adoption across both centralized and decentralized crypto platforms | Broader adoption across both centralized and decentralized crypto platforms |
| Use Cases | Favored by crypto-native users and protocols | Used for trading, lending, and payments | Used for trading, lending, and payments |