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Better Stablecoin Buy: Ethena USDe vs. Dai
Key Points
Most cryptocurrencies aren't safe investments for conservative investors. However, stablecoins have gained popularity as an alternative play for risk-averse investors because they are pegged to the U.S. dollar and other real-world assets.
The world's top stablecoins are all pegged to the U.S. dollar. Some are backed by actual U.S. dollars and Treasuries, while others are backed by different investments. Their ultimate goal is to ensure their value remains at $1.00.
Despite not keeping up with inflation or outperforming the S&P 500, stablecoins are appealing as they can be held without a bank account. They enable faster and cheaper cross-border money transfers and help preserve savings in countries with hyperinflation and currency devaluation issues. Additionally, they can be lent out in centralized finance exchanges and decentralized finance pools to earn higher yields than traditional savings accounts, CDs, and Treasuries.
The similarities and differences between Ethena USDe and Dai
Ethena USDe and Dai both peg their value to the U.S. dollar but are not backed by actual U.S. dollars or Treasuries, differentiating them from stablecoins like USD Coin and PayPal USD.
Ethena USDe, created on the Ethereum blockchain by Ethena Labs, is supported by a mix of crypto assets instead of fiat currency or Treasuries. Its protocol balances long spot positions in certain crypto assets with short derivative positions in others, aiming to keep the token value at $1.00. It promotes itself as a crypto-native token free from fiat currency regulations and has provided weekly independent attestations of its reserves since April.
Dai, developed by a decentralized organization called Sky (formerly MakerDAO), is backed by crypto assets locked up in "Maker Vaults." Users must deposit approved crypto assets worth more than the value of minted Dai, with a "stability fee" acting as a buffer against collateral volatility. Dai audits have been ongoing since 2018, and its crypto backing faces similar risks to Ethena.
One is clearly riskier than the other
Ethena USDe, utilizing derivatives trading, offers yields between 9%-11%, although they have dropped from around 55% last year. This reflects the underlying risks of its trading strategy.
Dai, not engaged in derivatives, offers a much lower yield of 1.5% from yield-generating protocols, reduced from 15% last year. Launched in 2017, Dai has a strong foundation in DeFi applications, making it a potentially safer stablecoin than the relatively newer Ethena USDe.
The better buy: Dai
Ethena USDe and Dai are riskier compared to fiat-backed stablecoins like USD Coin. Still, they offer interesting crypto-native opportunities. For cautious investors, Dai seems the better buy due to its absence of risky derivatives, survival through several crypto downturns, and broader use in DeFi applications. While Ethena's higher yields might tempt investors, the associated risks of its derivatives trading could be a deterrent.
This article has been published in fool.com via Yahoo News.
