UST and DAI are two stablecoins backed by other cryptocurrencies. Unlike other stablecoins, they are decentralized. Stablecoins are cryptocurrencies that maintain a stable price by being tied to another asset; crypto or fiat. They are less volatile than other cryptocurrencies.
DAI was launched in 2017 by MakerDAO and was built on the Ethereum blockchain. It has the stability of a stablecoin and is as secure as the Ethereum platform. Its stability is maintained by collateralizing it with ETH in a smart contract algorithm. It helps secure and power the Maker network on which it is generated and traded.
UST was launched in September 2020 by Terraform Labs. It is stabilized with the aid of a smart contract algorithm and an elastic money supply mechanism. New USTs are minted through a process called seigniorage. It is collateralized by LUNA- Terra’s native coin.
Both stablecoins are decentralized as they have no central authority like the other popular stablecoins. Similarly, they are pegged to cryptocurrencies rather than fiat currencies. They use smart contract algorithms to maintain stable prices.
In minting DAI, the collateral (ETH) must be way more than the amount of DAI to be minted. UST, on the other hand, needs an equivalent of LUNA in USD to mint the same amount. In doing this, a percentage of the LUNA is burnt, and another is reserved for the community treasury. The more UST is demanded, the more the appropriate amount of LUNA is burnt.
The smart contract algorithm used for stabilizing UST can generate UST and maintain itself. However, high volatility with ETH can affect the stability of DAI. Also, the market caps and trading volumes of these assets indicate that UST is adopted over DAI.
This might be due to UST’s arbitrage system that helps it automatically maintain supply when it is below peg. Right now, the Anchor protocol has made it possible to earn an APY of about 20% when UST is lent out. If you are looking to invest in a decentralized stablecoin, UST is the better investment.
In the crypto space, everything is volatile no matter how stable it seems. Thus, deal wisely and do your research. Don’t invest beyond what you can’t afford to lose.
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