A Practical Guide to Decentralized Dollars: Comparing DAI and USPD

In the world of decentralized finance, choosing the right stablecoin is a critical decision. For users committed to decentralization, MakerDAO’s DAI has long been the go-to choice, pioneering the very concept of a crypto-backed stablecoin. But as the ecosystem evolves, new protocols like USPD are emerging, offering a different set of trade-offs and benefits.

So, how do you decide between the established pioneer and a next-generation challenger?

This article breaks down the key differences between DAI and USPD in a simple, structured format to help you understand which protocol best fits your goals.

What is MakerDAO’s DAI?

DAI is a decentralized stablecoin soft-pegged to the US dollar. The easiest way to understand it is as a decentralized lending platform where you are the borrower.

How it works: Users lock up crypto assets (like ETH, WBTC, or even other stablecoins) as collateral in a “Maker Vault” and, in return, can mint—or borrow—DAI against that collateral.
The User’s Role: The user is responsible for ensuring their position remains over-collateralized (e.g., maintaining a 150% collateralization ratio) to avoid liquidation.
Primary Use Case: It’s a powerful tool for traders and DeFi users who want to gain leverage on their crypto assets without selling them.

What is USPD (US Permissionless Dollar)?

USPD is also a decentralized stablecoin pegged to the US dollar, but it operates on a different model. Think of it as a simple, 1:1 conversion protocol.

How it works: Users deposit staked ETH (stETH) into a smart contract and receive an equivalent amount of USPD.
The User’s Role: The user’s role ends at the deposit. The complex task of managing the collateral’s price volatility is handled entirely by a separate, professional network of “Stabilizers.”
Primary Use Case: It’s designed for users who want a stable, censorship-resistant, and yield-bearing dollar without the complexity and personal risk of managing a debt position.

The Pros and Cons: An Objective Look

Every protocol design involves trade-offs. Let’s look at the strengths and weaknesses of each.

MakerDAO (DAI)

Pros:

Battle-Tested and Resilient: As one of the oldest DeFi protocols, DAI has survived multiple market cycles, earning a high degree of trust and a reputation for resilience.
High Composability: DAI is deeply integrated across the entire DeFi ecosystem, making it a versatile “money lego” for use in countless dApps, lending markets, and liquidity pools.
Leverage Tool: Its core function as a collateralized loan is a powerful feature for sophisticated users who want to leverage their existing assets.
Collateral Diversification: By accepting multiple types of collateral, MakerDAO diversifies its risk across different assets.

Cons:

High User Complexity: The need to manage a Collateralized Debt Position (CDP) creates a steep learning curve and is not suitable for passive users.
Personal Liquidation Risk: The primary risk falls directly on the user. A sharp market downturn can lead to the liquidation of your collateral and significant financial penalties.
Centralization Risk in Collateral: A large portion of DAI’s collateral consists of centralized stablecoins like USDC, creating a systemic dependency. An issue with USDC could directly impact DAI’s stability and censorship resistance.
Borrowing Costs: Users must pay a variable “stability fee,” which is effectively an interest rate on their loan, making it less attractive for simply holding a stable asset.

USPD (US Permissionless Dollar)

Pros:

Simplicity and Accessibility: The user experience is a straightforward 1:1 conversion. This low barrier to entry makes it accessible to a much broader audience.
No Personal Liquidation Risk: The protocol’s “risk-abstracted” model means users are completely shielded from the risk and stress of managing collateral and avoiding liquidation.
Purely Decentralized Collateral: By using only staked ETH (stETH) as collateral, USPD has zero exposure to centralized or corporate-issued assets, giving it a stronger claim to true censorship resistance.
Passive Native Yield: All holders automatically earn a sustainable yield from Ethereum’s staking rewards without any extra steps, making it a productive asset to hold.

Cons:

Newer Protocol: As a new entrant, USPD has not been “battle-tested” through as many market cycles as DAI.
Initial Liquidity: In its early stages, USPD’s liquidity on decentralized exchanges may be less deep than DAI’s established, multi-billion dollar pools.
Dependency on Stabilizer Network: The protocol’s stability relies on a healthy and sufficiently capitalized network of third-party Stabilizers to manage the hedge effectively.
Single-Collateral Focus: While a strength for decentralization, relying solely on stETH means the protocol’s health is tightly coupled to the Ethereum ecosystem.

How to Choose: Matching the Protocol to Your Goal

Ultimately, the better choice depends on what you are trying to achieve.

DAI is the ideal tool for a specific job: decentralized leverage. If you are an active, sophisticated DeFi user who wants to borrow against your crypto holdings and are comfortable actively managing the associated risks, DAI is a powerful and proven option.
USPD is the ideal choice for a different job: holding a simple, stable, and productive digital dollar. If you are a user who values decentralization and censorship resistance but wants to avoid personal risk, complexity, and borrowing fees, USPD offers a more direct and accessible solution. It is designed for those who want to save, transact, and earn a passive yield with peace of mind.

Learn more about how USPD works.