Most cryptocurrencies aren’t safe investments for conservative investors. But over the past decade, stablecoins — which are cryptocurrencies tethered to the U.S. dollar and other real-world assets — have become popular alternative plays for risk-averse investors.
The world’s top stablecoins are all pegged to the U.S. dollar. Some of those coins are backed by actual U.S. dollars and Treasuries, while others are backed by other investments. Their ultimate goal is to track the U.S. dollar — so their value should stay at $1.00.
It might seem counterintuitive to invest in stablecoins because they won’t keep pace with inflation or outperform the S&P 500 (^GSPC 0.01%). However, stablecoins can be held without a bank account, used for faster and cheaper cross-border money transfers, and help people preserve their savings in countries with hyperinflation and currency devaluation issues. They can also be lent out in centralized finance (CeFi) exchanges and decentralized finance (DeFi) pools to earn higher yields than traditional savings accounts, CDs, and Treasuries.
I recently compared two of the top stablecoins: Tether (USDT -0.02%) and USD Coin (USDC 0.01%). Today, I’ll examine two lesser-known USD stablecoins — Ethena USDe (USDE -0.04%) and Dai (DAI 0.02%) — and see if either token is worth buying.
Ethena USDe and Dai both peg their value to the U.S. dollar, but neither token is backed by actual U.S. dollars or Treasuries. That sets them apart from stablecoins like USD Coin and PayPal USD (PYUSD -0.00%), which are both supported by U.S. dollar reserves.
Ethena USDe was initially minted on the Ethereum (ETH -1.91%) blockchain by Ethena Labs. It’s supported by a mix of crypto assets (including Ether, Lido Staked Ether, and other tokens) instead of U.S. dollars or Treasuries. Its protocol constantly balances long spot positions in certain crypto assets with short derivative positions (like futures) in other crypto assets to generate gains and losses to remain pegged to the U.S. dollar.
Simply put, Ethena juggles a bunch of crypto positions to keep the value of its token at $1.00. It claims that this crypto-native approach frees it from the regulations associated with fiat currencies (unlike USD Coin or PayPal USD). However, it’s only opened up its reserves to weekly independent attestations since this April — and it’s unclear if it can maintain its delicate balancing act if another crypto winter begins.
Dai was created by an autonomous, decentralized organization called Sky (formerly known as MakerDAO). It’s backed by crypto assets locked up in smart contracts called “Maker Vaults.” To mint a new Dai token, a user must deposit an approved crypto asset (like Ether or Wrapped Bitcoin) worth more than the value of the minted Dai. That premium, called a “stability fee,” acts as a buffer against the volatility of its underlying collateral.
If the value of Dai’s collateral drops during a crypto downturn, it can liquidate some of those vaults to stay pegged to the U.S. dollar. Like Ethena, Dai promotes itself as a fully decentralized stablecoin that isn’t tied to real U.S. dollars. It’s been thoroughly audited since 2018, but its underlying crypto assets face the same broader risks as Ethena.
Ethena USDe, through its usage of derivatives trading, generates “carry” (extra profits) that are passed on to its investors. But its high yields (about 9%-11%) reflect the risks of those underlying trades, and they’ve already dropped sharply from its yields of about 55% last year.
Dai, which doesn’t trade any derivatives, offers a much lower yield of 1.5% for deploying its tokens into other yield-generating protocols. That’s also down from its yield of 15% last March.
Dai was launched in 2017, and it’s already been integrated into a wide range of DeFi applications. Ethena USDe, which was only launched last year, hasn’t been as widely adopted. That stronger foundation of developers could make Dai a safer stablecoin than Ethena USDe.
Ethena USDe and Dai are much riskier than fiat-backed stablecoins like USD Coin, but they’re both interesting crypto-native plays. I wouldn’t rush to buy either of these tokens right now, but Dai is clearly a better buy for three simple reasons: It doesn’t dabble in risky derivatives, it’s already survived several crypto crashes since its creation, and it’s more broadly used in DeFi applications. Ethena’s higher yields might look tempting, but they’re shrinking and might not justify the added risks of its derivatives trading.
