UST and DAI are two stablecoins backed by other cryptocurrencies. Unlike many other stablecoins, they are decentralized. A stablecoin is a digital asset designed to maintain a steady value by being pegged to another asset, whether crypto or fiat, which makes it far less volatile than most cryptocurrencies.
DAI was launched in 2017 by MakerDAO and is built on the Ethereum blockchain. It combines the price stability expected of a stablecoin with the security of the Ethereum platform. DAI’s stability is maintained by overcollateralizing loans with ETH through smart-contract algorithms. This mechanism helps secure and power the Maker ecosystem where DAI is issued and traded.
UST was launched in September 2020 by Terraform Labs. It relies on smart-contract algorithms and an elastic supply mechanism to maintain its peg. New UST is minted through a process known as seigniorage and is collateralized by Terra’s native token, LUNA.
Both of these stablecoins are considered decentralized because they do not depend on a central authority like many popular fiat-backed stablecoins. Instead of being pegged to fiat currencies, they are linked to cryptocurrencies and use smart contracts to help keep their prices stable.
When minting DAI, the collateral (typically ETH) must significantly exceed the value of the DAI being created, providing a buffer against volatility. By contrast, minting UST requires an equivalent USD value of LUNA: some LUNA is burned in the process and some is allocated to the community treasury. The more UST that is minted, the greater the amount of LUNA that is burned.
The smart-contract algorithm underpinning UST is designed to automatically mint UST and help maintain its own supply. However, high volatility in ETH can affect DAI’s stability despite overcollateralization. Market metrics such as market capitalization and trading volume suggest that UST has enjoyed wider adoption than DAI in certain periods.
Part of UST’s appeal has been its arbitrage system, which automatically adjusts supply to help preserve the peg when market conditions change. Protocols built around UST, such as Anchor, have historically offered attractive yields—for example, APYs around 20% on UST deposits—making it appealing to some investors. For those focused strictly on decentralized stablecoins, UST has been viewed by many as a more attractive option.
That said, the crypto space remains inherently volatile, even for stablecoins that appear steady. Always invest carefully and do your own research. Never invest more than you can afford to lose.