Ethereum Is Now the Primary Collateral for Decentralized Stablecoin DAI

The algorithmic stablecoin DAI is now backed by more Ethereum than the centralized stablecoin, USD Coin (USDC). 

The milestone comes after months during which USDC made up more than 50% of the decentralized cryptocurrency’s backing. 

At press time, the amount of Ethereum backing DAI has risen to 41.4%, and the amount of USDC has fallen to 34.5%, according to data from Dai Stats. 

The milestone indicates the stableoins’s declining reliance on centralized entities too—a key tenant of the industry.

This is because USDC is run by a consortium called Centre, of which Circle and Coinbase are members, that maintains the stablecoin’s value through reserves of real U.S. dollars and other financial instruments that track the greenback. 

Centre also has control over every USDC circulating in the market, and they have made this known on several occasions. In July 2020, for instance, the consortium froze an Ethereum address holding $100,000 of USDC as per its cooperation with law enforcement agencies.  

By contrast, Ethereum is not backed by a fiat currency; it is a decentralized cryptocurrency, with the market determining its value. It would be nearly impossible to stop transfers in Ethereum. 

What is DAI? 

DAI is a stablecoin that is managed by DeFi protocol MakerDAO. It maintains its peg to the dollar by carefully curating a pool of Ethereum-based assets. When you deposit an Ethereum-based asset, like USDC or ETH, into MakerDAO, you receive DAI in return. 

The stablecoin is over-collateralized to account for the industry’s infamous volatility. This means that when you deposit $150 in Ethereum, you’ll receive $100 in DAI. 

This pool used to be entirely composed of decentralized assets, like Ethereum. When the COVID-19 pandemic hit, MakerDAO voted to change that, however. 

The market became so dicey at that time that the protocol needed a stable asset to prevent the protocol from collapsing. In March 2020, MakerDAO’s community voted to partially back DAI with USDC.

Despite ongoing dominance from the stablecoin, raising questions about whether DAI is just USDC with a different name, it appears the industry’s most popular decentralized stablecoin is back.