While traditional cryptocurrencies can be risky for conservative investors, stablecoins have emerged as a more appealing option for those looking to minimize their exposure to market volatility. These digital currencies, which are tied to the U.S. dollar and other tangible assets, have gained traction over the past decade among risk-averse investors. The leading stablecoins predominantly maintain a peg to the U.S. dollar, with some being directly backed by actual U.S. dollars and Treasuries, while others derive their value from a mix of investments. The primary objective of stablecoins is to maintain a stable value around $1.00.
Investing in stablecoins may appear counterintuitive since they typically do not keep pace with inflation or provide returns that surpass those of traditional stock indices like the S&P 500. Nevertheless, stablecoins offer significant advantages, such as the ability to hold them without a bank account, facilitate quicker and cheaper cross-border transactions, and help individuals protect their savings in regions suffering from hyperinflation and currency depreciation. Additionally, they can be utilized in centralized finance (CeFi) exchanges and decentralized finance (DeFi) pools to earn yields that exceed those found in standard savings accounts, certificates of deposit (CDs), and Treasuries.
In this analysis, I will compare two lesser-known stablecoins, Ethena USDe (USDE) and Dai (DAI), evaluating their potential as investment options. This follows a previous examination of two prominent stablecoins: Tether (USDT) and USD Coin (USDC).
Comparing Ethena USDe and Dai
Both Ethena USDe and Dai are designed to mirror the value of the U.S. dollar, but they are distinct in that neither is backed by actual U.S. dollars or Treasuries. This differentiates them from stablecoins like USD Coin and PayPal USD, which maintain reserves of U.S. dollars. Ethena USDe was launched on the Ethereum blockchain by Ethena Labs and is supported by a variety of crypto assets, including Ether and Lido Staked Ether, rather than direct fiat backing. Its mechanism involves balancing long positions in specific crypto assets with short positions in derivatives to generate profits and losses aimed at maintaining a stable peg to the dollar. In essence, Ethena employs a complex strategy of managing various crypto positions to keep its token’s value at $1.00.
Ethena claims this crypto-centric approach allows it to operate free from the constraints of fiat regulations, unlike USD Coin or PayPal USD. However, it has only recently begun conducting weekly independent attestations of its reserves, raising questions about its ability to sustain this balance during potential future downturns in the crypto market.
Dai, on the other hand, was developed by a decentralized organization known as Sky, previously MakerDAO. It is secured by crypto assets locked in smart contracts referred to as “Maker Vaults.” To create new Dai tokens, users must deposit an eligible cryptocurrency, such as Ether or Wrapped Bitcoin, which must exceed the value of the minted Dai. This excess, termed a “stability fee,” serves as a safeguard against the volatility of its collateral. Should the value of the collateral decline during a downturn, Dai can liquidate some vaults to remain pegged to the U.S. dollar. Like Ethena, Dai markets itself as a fully decentralized stablecoin that is not linked to actual U.S. dollars. It has undergone extensive audits since 2018, but its crypto assets are still exposed to the same risks as those faced by Ethena.
Assessing the Risks: Ethena USDe vs. Dai
Ethena USDe utilizes derivatives trading to generate additional profits, referred to as “carry,” which are then shared with its investors. However, the high yields of approximately 9%-11% come with significant risks tied to the underlying trades, and these returns have sharply declined from about 55% last year. Conversely, Dai, which does not engage in derivatives trading, currently offers a much lower yield of 1.5% for deploying its tokens into yield-generating protocols, down from a peak of 15% in March. Since its launch in 2017, Dai has been incorporated into a wide array of DeFi applications, whereas Ethena USDe, only introduced last year, has not achieved the same level of adoption. This established integration could indicate that Dai presents a safer investment compared to Ethena USDe.
The Superior Investment Choice: Dai
While both Ethena USDe and Dai carry more risk than fiat-backed stablecoins like USD Coin, they present interesting opportunities within the crypto ecosystem. At this time, I wouldn’t recommend rushing to purchase either token; however, Dai stands out as the preferable option for several reasons: it avoids the risks associated with derivatives, has weathered multiple crypto market crashes since its inception, and enjoys broader utilization within DeFi platforms. Ethena’s attractive yields may seem appealing, but their decline raises concerns about whether they adequately compensate for the risks involved in derivatives trading.
