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Since DAI is a USD based stable coin along with USDT and USDC, then why are their lending rates so different? In theory, the risks behind owning any of these stable-coins is similar so their lending rates should be similar too, right?

Clearly my thinking has a huge gap somewhere. Can someone please elaborate what am I missing? For example, here is what I see at the time of writing: https://app.aave.com/borrow (image attached)

enter image description here

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Well, here comes my speculation.

The lending rates for the three last tokens are quite similar. They are all centralized stablecoins with a bit different mechanisms.

The first (DAI) is not a centralized stablecoin - it's a decentralized one. This gives it a few advantages:

  1. It's not dependent on any company. It doesn't go down if some company goes down

  2. Related to the previous point: it can't be taken down. No single point of failure. Nobody has control over it (except decentralized token holder governance).

  3. It's transparent. Everyone can see how it works. This creates a whole new level of trust compared to the centralized ones. The centralized coins can make all sorts of claims but in the end it's very difficult to ascertain how correct they are

In light of the above points, in my opinion, the risks are quite different. Maybe a tax authority decides that one of the companies has to stop functioning. Maybe they have a governance scandal. Maybe some of them turns out to be a scam. Who knows, but none of the above is possible with DAI as it can't be stopped.

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  • There is probably no "right" answer for this, so I'm not sure if any answer should be marked as "accepted" – Lauri Peltonen Sep 14 at 16:53
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The other answer explaining different risk profiles is wrong. There is no way that there is much more trust in DAI than USDC, say, that people are willing to pay 68% APR versus 6%.

While it seems like 68% APR is ridiculously high, at a daily interest rate, it is quite small compared to the gains you can make from using DAI to trade.

For example, take a look at this screenshot of the page you linked: enter image description here

It shows DAI price is $1.05. If you believe the DAI peg is strong, you should immediately produce DAI and sell it. As you can also see from the screenshot, utilization rate is at 99.71%, which supports this hypothesis.

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  • Wouldn’t it be more accurate to look at longer term borrow rates (like 30 day) and completely ignore the daily? In which case, do you think the first answer then holds true? – Newskooler Sep 14 at 16:02
  • Why would you look at 30 days? Price of Tether and USDC is $1.00 right now, while DAI is $1.05. You can sell your DAI, buy USDC, and collect the difference. That's 5% in an instant. You can rinse and repeat: take your USDC and generate more DAI. Collect another 5%. And so on. Collect your collateral later when DAI goes back down. – Chan-Ho Suh Sep 14 at 16:16
  • Tether and USDC are by far the most used stablecoins, even after disregarding use by big entities like exchanges. The issue of centralization hasn't really been a disadvantage for adoption. The risk differences is a nice narrative, but there is not much evidence for it. – Chan-Ho Suh Sep 14 at 16:22
  • An interesting analysis, which is quite different from mine :) luckily I only said I'm speculating, as I really don't know. – Lauri Peltonen Sep 14 at 16:52
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It depends on the supply and demand. If more people want to borrow DAI, its supply % returns will be higher compared to the rest. In compound the borrow and lending percentages are based on the supply and demand for any given coin for whatever reason.

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We need to distinguish the decentralized solutions from the centralized ones :

  • In the case of decentralized lending protocols, interest rates are adjusted by a smart contract and depend on the supply and demand of the asset. For example, if the number of borrowers increase, the interest rates will rise to encourage lenders to provide liquidity.

  • In the case of centralized lending platforms, interest rates are determined centrally by the entity, which can basically do what it wants. That's why interest rates are often static on these platforms. They are also very high compared to those of the decentralized protocols but associated with a higher credit risk. On the other hand, decentralized platforms present much higher technical risks.

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  • So an example is DAI for what you are referring to. Isn’t supply and demand also what is affecting the rate on centralised ones as well? – Newskooler Sep 14 at 16:15
  • I edited my post. – clement Sep 14 at 16:52
  • I am not sure that your answer is correct. For example an trading exchange such Coinbase only meets buyers and seller but the price is determined by supply and demand. How is a centralized lending platform different? Why do you need a smart contract to have a variable lending rate? Can you please elaborate? – Newskooler Sep 14 at 16:59
  • Centralized platforms have their own model but for sure they use the supply/demand theory. Smart contract enables to fix the rules, as they are immutable. With centralized platforms, rules can change at any time. – clement Sep 14 at 17:04

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